A balance sheet is like a financial kundali, which consists of all the details, A to Z, of the company’s financial health. Through a balance sheet, investors can analyze the company’s expenses, borrowings, earnings, spending, and much more. Are you also planning to apply for the upcoming IPO 2026? Read this article till the end to improve your IPO analysis.
What is a Balance Sheet?
A balance sheet is a company’s financial statement that shows its assets, liabilities, and shareholders’ Equity. When a company plans to launch its Mainboard IPO or SME IPO, they file a draft red prospectus, which includes complete financial details like its Assets, total income, Net Worth, total borrowings, and overall financial strength. Simply put, an IPO’s balance sheet shows how much the company earns, how much it has borrowed, and how much shareholders’ equity it has.
Importance of Balance Sheet
Analyzing a balance sheet before investing in an IPO helps investors understand the company’s financial strengths and risks. When it comes to IPO analysis, reviewing the Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP) is essential before going public.
The balance sheet helps investors understand how the company is performing over the years. It shows what companies own and what they owe.
Key Balance Sheet Factors Before Applying for an IPO
1. Debt-to-Equity Ratio:
The Debt-to-Equity ratio indicates how much debt a company has compared to its equity. In a company, the source of funding comes from shareholders, which means Equity, and the other is borrowing from banks or institutions, which is debt. Through the D/E ratio, investors can understand how much borrowing the company has at the current date.
The formula of the Debt-to-Equity ratio
Debt-to-Equity Ratio = Total Debt ÷ Shareholders Equity
For example, A company with a D/E ratio ranging from 0.5 to 1.5 indicates a low-risk and conservative company. While a D/E ratio of 2.0 or more suggests high financial risks.
2. EBITDA:
EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) is a financial metric that shows how well the company is generating profit from its core business before deducting interest, taxes, depreciation, and amortization. The higher EBITDA means the company is doing well, generating good profit.
Formula for EBITDA
EBITDA = Revenue − Operating Expenses
3. Net profit:
Net Profit or Net income is a financial ratio that shows how much revenue a company generated from its operations after deducting all the expenses, interests, and taxes. A consistently high or increasing Net Profit usually indicates a strong core business.
The formula is:
Net Profit = (Net Income / Total Revenue) × 100
4. Current Ratio
A current ratio is a liquidity ratio that measures how many assets the company owns compared to the liabilities the company owes. The higher the current ratio, the more assets the firm has than liabilities.
The formula is:
Current Ratio = Total Current Assets / Total Current Liabilities
5. EPS (Earnings per Share)
EPS (Earnings Per Share) shows investors how much earnings or profit the company made per share. The company with higher EPS will generally be considered more profitable and attractive to investors.
Formula of EPS
EPS = Profit After Tax ÷ Number of Shares
For example, Net Profit (PAT) of BCCL company for FY25 is ₹1,240.19 crore, and the total shares of the company are 4,657,000,000 equity shares.
EPS = ₹1,240.19 crore ÷ 4,657,000,000 equity shares = ₹2.66 per share
6. Return On Equity (ROE)
ROE(Return on Equity) is a ratio that tells how much profit a company is making from its shareholders’ money. ROE shows how good a company is at turning the money of shareholders into profitability.
Formula of ROE
ROE = Net income ÷ Shareholders’ Equity
For example, Company ABC and XYZ both generated 10 crore profit. Which company do you invest in? The ROE of company ABC is 20%, and the ROE of XYZ is 12%, meaning company ABC has used the funds of shareholders more efficiently to generate profit, making it an investable company.
7. ROCE
ROCE (Return on Capital Employed) is a financial ratio that indicates how much profit a company generates using its total capital.
Formula to calculate ROCE
ROCE = EBIT (Earnings Before Interest and Tax) ÷ Capital Employed
For example, the EBIT (Operating profit) of the company is ₹100 crore, and the capital employed is ₹400 crore. If calculated as per the formula: ROCE = 100/400 x 100 = 25%, which is considered a very strong ROCE. Meaning the firm is earning a ₹25 profit on every 100 invested. An ROCE above 15% considered good, and below 10% may indicate poor use of capital.
8. P/E Ratio
P/E ratio (Price-to-Earnings ratio) is a financial ratio that shows how much money you are ready to pay for the Rs. 1 of the company’s earnings. For example, the P/E ratio of the ABC company is 20x, meaning people are willing to buy it for Rs. 20 for its Rs. 1 earnings. Now, why will you pay more money? Because you feel the growth potential of the company is good.
Now, how do you know the P/E ratio of the particular company is high or low? Simply compare the P/E ratio of the company with its industry’s average P/E ratio to see if the P/E ratio is cheap or expensive.
9. PAT (Profit After Tax)
PAT (Profit After Tax) is the final profit of a company after subtracting expenses, interest, depreciation, and gov tax.
For example, you generated a total revenue of ₹2000 by selling shoes online. The cost of the shoes is ₹1000, so ₹2000 -₹1000 = ₹1000. Is this your final profit? No, this is your gross profit. Various costs will be deducted from the ₹1000, like commission, delivery charges, packaging, employees’ salaries, and rent.
After deducting these, you get Operating Profit (EBITDA). Next, Interest is deducted → Profit Before Tax (PBT). Government tax is deducted → PAT (Profit After Tax). The remaining amount is your PAT, which is the final profit of the business.
10. Net Worth
Net Worth indicates the actual profit of the company after subtracting the total debt (assets) from total liabilities.
Formula:
Net Worth = Total Assets – Total Liabilities
For example, if the company’s total assets are ₹50 crore and liabilities are ₹30 crore, the calculation will be ₹50 – ₹30 = ₹20 crore, which will be the Net worth of the company.
11. Order Book
An order book is an electronic record of all the bids placed by investors during the subscription period of the IPO. An order book shows the demand for an IPO, how many shares investors want to buy, and at what price.
12. RoNW
RoNW (Return on Net Worth) indicates how well a company is using shareholders’ money to generate profits. Here is how you can calculate it.
Formula of RoNW
RoNW = Profit After Tax ÷ Net Worth x 100
13. P/B ratio
A P/B ratio, or Price to Book ratio, indicates how much you are paying for a company compared to what it owns. The P/B ratio usually indicates whether the company’s shares are undervalued or overvalued.
If the P/B ratio of the company is less than 1, it suggests that the company may be facing business challenges or that its shares are undervalued. In contrast, if the P/B ratio of the company is more than 5, the investors are willing to pay 5 times more than the actual price, which can indicate 2 things: either investors are accepting growth from the company or the stock is overvalued.
Formula of the P/B ratio
P/B ratio = Market Price per share ÷ Book value per share
14. Net Working Capital days
The Net working capital days of the company indicate how many days a company’s money is blocked in its daily business. If the firm’s net working capital days keep increasing, it means the company’s cash gets blocked, which affects its daily operations and cash flow.
Formula:
NWC Days = Inventory Days + Receivable Days – Payable Days
15. Market Capitalisation
Market Capitalisation, or Market Cap, refers to the total market value of the company to date. Through the Market cap, you can determine the value of the company in the stock market.
Formula of Market Capitalisation
Market Capitalization = (Current Stock Price) × (Total Number of Outstanding Shares)
For example, the share price of the ABC company is 431, and the total number of Outstanding shares of the company is 6,161,649,049.
Market Capitalization = 431 × 6,161,649,049 = ₹2,655,670,740,119, so the Market Cap of the ABC company is ₹2,65,567 crore.
16. Reserves and Surplus
The reserves and Surplus is an amount that show how much profit the company has saved over the years. The increasing reserves and surplus indicate that the company is financially strong. Checking reserves and surplus can be one of the important factors for IPO investment.
17. OPM
OPM or Operating Profit Margin is a figure that shows how much profit a company is earning from its operations. Investors check OPM% before investing in an IPO. The OPM of the company indicates how well a firm is running its business.
Formula
OPM (%) = Operating Profit ÷ Revenue × 100
18. CARG
CAGR stands for Compound Annual Growth Rate, which helps to calculate how much a business is growing on average each year.
19. NAV
NAV, known as Net Asset Value, indicates the value of one share of a company based on its total assets and liabilities.
Formula
NAV per Share = (Total Assets − Total Liabilities) ÷ Total Number of Shares
20. Net Fixed Asset Turnover
Net fixed asset turnover is a financial ratio that indicates how much profit a company is generating using its fixed assets. The fixed assets can be land, buildings, equipment, machinery, and manufacturing plants.
Formula
Net Fixed Asset Turnover = Net Revenue ÷ Net Fixed Assets
Conclusion
Safe and risk-free IPO investment can only happen when investors learn to analyze the balance sheet. Understanding the company’s financial health, its net worth, its profit, and its earnings can help investors to carefully apply for the upcoming IPO 2026, whether it is a Mainboard IPO or an SME IPO. Other than financial metrics, we recommend investors also check the company’s strengths, risks, its reputation, use of its proceeds, legal disputes, its promoters’ background, and lastly its GMP for successful IPO investment.
