How To Assess A Prospectus
When assessing a prospectus, the most important rule to follow is simple, READ EVERYTHING. This is because the prospectus is prepared to provide you with full insight into the operations of the company. All information available to you should be utilized in assessing a company which should guide your investment decisions.
While the prospectus contains a lot of information, there are key components that you should pay particularly close attention to, namely:
- Business Overview
- Corporate Governance
- Use of Proceeds and Business Plan
- Industry Overview and Outlook
- Historical Performance
- Risk Factors
This section should provide you with a synopsis of the company to give a better understanding of who they are. What does the company do? What services do they provide? How long have they been operating? What are the drivers of their business? The answers to these questions are what you look for when reading through the business overview section.
“A ship is only as good as it’s captain” and this applies to businesses as well. This section is extremely important. The Corporate Governance component of a prospectus details the “who’s who” of a company. This section details the board composition and the Management Team. Both the Board and the Management team should comprise of a variety of individuals who are familiar with the industry and have a wide range of experience.
Use of Proceeds and Business Plan
Now at this stage, you should already have an idea of what the business does and the individuals behind the business. The question you ask now is “Why do they want my money?”. Here, they are essentially pitching the company to you and they need to convince you fully that you will benefit from giving them your money. The use of proceeds should be very specific and unambiguous, so investors are not left open to interpretation. If a company wants your money, you should know why. In this section, the business plan should also be stated as it gives you a guide and a breakdown of how your money will be fully deployed. It also states the company’s possible dividend policy. This is also very important as this forms a critical component of an investors’ total return.
Industry and Outlook
It is easy for persons to “talk the talk”, but this section lets you see if they can “walk the walk”. The industry and outlook should be substantial enough to allow you to visibly see the other competitors in the industry. In this section, you should see what exactly sets them apart from their competitors and the trends within industry. Guidance should be provided in the outlook as well because you need to know that there is a future for this company, along with a future for this industry.
Here is where you deep dive into the numbers. The number one rule is “The Devil is in the details”. When analyzing the historical performance of a company, it is critical that you examine the financial notes that support the numbers which are usually around the back of the prospectus. Only in the notes will you get a comprehensive idea of what were the drivers of the company and the meaning behind the numbers. You would have also calculated a few financial ratios to give you a clearer picture of how well the business is performing. Examples of financial ratios are the operating margin and profit margin, which indicates how well the company manages its expenses. An investor may also want to look at how leveraged the company is to determine its financial health. Remember, the higher the amount of debt means there is greater financial risk to investors who want to consider investing in the IPO. You would not want to invest your money in a company that isn’t profitable or has a debt burden that is unsustainable.
After dissecting the notes, you should have a full understanding of how the company makes its money and how well they manage that money. At this stage you are focused now on what are the risks facing the company. The listed risk factors facing any company are never an exhaustive but should be sufficient enough to allow you to make an informed decision. Always remember that when you participate in an IPO, you are a shareholder in that company. Their business is your business. As an equity shareholder, you are taking majority of the risks so understanding them is extremely important.
Overall, the prospectus just provides a guide into what the company is about, who they are, how they’ve done and what they plan to do. Before you become a shareholder, you need to ensure that you fully understand all those aspects. A prospectus is usually filled with a lot of words and at times can be intimidating. However, your financial advisors at PROVEN Wealth are fully capable of dissecting this document for you and answering any of the questions you may have to ensure you make the best financial decision.
All expressions of opinions are subject to change without notice. The information contained herein was obtained from sources which we consider reliable, but we have not independently verified such information and thus do not guarantee that it is accurate or complete. Additional information is available upon request. PROVEN Wealth Limited (“PWL”) is a wholly owned subsidiary of PROVEN Investments Limited. All opinions and estimates constitute PWL’s judgment as of the date of the report and are subject to change without notice. PWLL may have a proprietary interest in the securities recommended above. The above recommendations are indicative and do not constitute an offer to buy or sell.