The SME IPO Handbook · Chapter 6 of 12
Reading an SME Prospectus
Start with the same basics
Objects of the issue, fresh versus OFS, use of proceeds, and the shareholding before and after the issue. In SME issues, how much the promoters keep after the issue is a key indicator of commitment.
Extra checks for SMEs
Customer and supplier concentration, dependence on one promoter, related-party transactions, working-capital needs, receivable days, and whether the business has a history of stable profit rather than a recent jump.
Red flags
Large related-party loans, recently changed auditors, a sudden jump in profit just before the IPO, a business that was only recently started under the current name, or an issue where most of the money goes to repay promoters' loans.
Cash flow versus profit
Check operating cash flow. A company with rising profit but negative operating cash flow for several years may be recording sales it does not collect.
Documents
The prospectus for every SME issue in our database is linked in the Prospectus Centre.
Key takeaways
- Check customer concentration and related-party dealings.
- Sudden profit spikes before the IPO deserve questions.
- Heavy promoter selling is a signal to examine.
- Compare profit with operating cash flow.