Introduction to Financial Analysis Model
Every business must know about opportunities, obstacles, profitability, worthiness and position related to finance for developing growth of business and surviving among competitors. But, gaining that information from various fields is very hard. So, financial analysis is a concept that gets all information obtained by financial statements that use divergent methods and tools. Relation between different factors of finance of company is done with help of financial analysis. It is helpful for evaluating potential and profitability, financial strength, management efficiency, comprehending information, solvency of long. Its short-term debts and deviation reasons. Simply, financial analysis is helpful for making decisions that are informative by understanding loopholes and strengths of company hinged on financial health (Alshowishin, 2021).
It involves addressing analysis of company conditions related to finance and giving directions for changing decisions by providing possibilities of solutions. It performed actions by comparing income statement and balance sheet values. Financial analysis model is a tool for producing financial situation of organization in simple presentation that easily understood by any organization. It is nothing but predicting outcomes by creating financial roadmaps. It assists in estimating scenarios that occur in future and making plans which are strategic that help in making suitable decisions. Its avoiding risks in management of company.
Introduction to Initial Public Offering Model
Initial public offering model refers to mechanism of making first time obtainable to public with private organization shares. It happens when company security is first time vending to public with expectation of developing liquid market. IPO is the abbreviation for initial public offering and security is related to equity or company debts. Generally, organizations start business by raising capital of equity from minimum investors, if it requires extra capital, organization goes for IPO model and improves liquidity. By this, they benefited with cost because costs are correlated with indirect and direct which helps in adding liquidity (Brau & Fawcett, 2006).
When organization uses IOP, association is between investors and organization directly and company gets money as share capital. IPO is very helpful for entrepreneurs because it is useful for raising capital, boosting image of company, enhancing publicity and motivating staff. Process of IPO includes three participants such as investors, underwriters and issuing firms. Investor’s goal is to purchase fresh problems at price of bargaining, issuing firm aims to increase capital from buoyance, whereas underwriter acts as mediator between investors and issuing firms. For most situations, only way to instantly get liquids and enlarge those liquids possible with IPO model.
Key Benefits of Initial Public Offering Model
Initial public offering gives various benefits to investors for enhancing growth of business. One of the benefits is listing gains. When organization starts placing value of price more than price that is offered, then company procures bulk number of gains. Increasing liquidity is another benefit and when company sells shares publicly, IPO gives flexibility to investors in purchasing. Its vending shares at any time which helps in increasing liquidity. Another benefit is that IPOs give fair opportunity to retail investors. Generally, low allocation of shares for retail investors, IPO gives chance for them as one share, if one share is not workable, it uses lottery method.
Stringent norms of IPO are useful for saving investors from risk and provide comprehensive information related to company plans, risks, financial growth. Its performance that make company well in making thoughtful decisions (Mohta, 2023). If shares are assigned when performing IPO, person who marketing becomes shareholder of company. Its gets authority in procuring rights related to voting in normal meetings which occur annually. If organization is expected to accomplish good in long term, that organization must invest in an IPO. Because IPO has strategy for serving as well in long term.
Using of IPO Model
Initial Public offering model is mostly utilized by countries that are developing such as Japan, Western Europe, USA and China in developing capital markets. By using IPO model, these countries are benefited that are raising funds in bulk amounts, achieving flexibility in financial structure, minimizing borrowing costs, earning liquidity over shares of equity, enhancing visibility, recognition and prestige of companies, sudden increasing value of capital without rising risk and determining company’s values of markets. Apart from this, those countries get various opportunities including diversifying company risks that provide company scale and enhance transparency of company by referring to disciplines of capital markets. In the initial public offering (IPO), the issuing company sets a lower share price than the market price, a practice known as underpricing, to manage the difference between the IPO price and the market price on the first day.
For this, it uses signaling and asymmetry of information methods. Variables of macroeconomics help know factors that manipulate price range and activities of IPO and its trends perform divergent actions in various countries. It involves institutional framework and financial market characteristics that effectively help in financial market at global level which ensured by standards and regulations of international promulgated by global level competition.
Drawbacks of Initial Public Offering
Initial public offering one of the drawbacks is pricing is difficult. In IPO, it does not contain observable price of market to offer because most issuing ventures have less or no history of operating. If an investor does not fix price at a higher level, they do not reap the benefit of raising market capital. If the issuer sets the price very high, they get substandard returns and reject the offer. So, accurate pricing is necessary for every venture especially young companies to accelerate capital. The market demand greatly influences this drawback. Because evaluating information from process of IPO is hard. It makes it hard to arrange commitments rather than giving importance to flexibility.
Companies face obstacles when choosing commitments that include high risks instead of making good efforts. Another drawback is process of IPO is expensive. Printing, accounting and legal costs are need to paid if IPO is failure or successful. Increased need for regulations is another drawback that occurs when organization is using IPO, companies must subject to various regulations like reporting needs of SEC which are time taking and expensive to incorporate. Control loss is one of drawbacks of IPO. When moving to public exposure, founders of company lose control over initial investments and power of making decisions is shifted to shareholders of public.
Relations of Investors
Relations of investors, disclosure of information, pressure to manage pattern growth and risks are other various drawbacks in IPO. In relation to investors, company held meetings of stakeholders and normal members of board then difficult to manage opinions of every member of board which resulted in bad impact on performance of company (Benninga, Helmantelc, & Sarig, 2023). Everyone publicly discloses financial statements and operations of the company, resulting in the loss of vital information. People, including competitors, employees, customers, and others, examine the detailed company information that is disclosed in IPO documents.
The company discloses information not only during an IPO but also on an ongoing basis. Company faces external and internal pressure to manage patterns of growth. If the company’s earnings decrease below the trend when established, stockholders sell more stocks disregarding prices to match the growth rate, resulting in low earnings and prices for future actions. (Active Voice) For covering company expenses, in IPO stockholders make decisions wrongly that lead to rising risks for company.
Recommendations
When any organization wants to invest in initial public offering, must follow various strategies for saving company from sudden risks. Initially, thoroughly analyze background of company, future prospects and financial situation before investing. Get details about locking period of IPO because that period stops company’s ability to vend shares instantly after completion of first investment. Always plan good strategy before entering into IPO. Make sure company objectives, tolerance of risk, and analyze whether that IPO is suitable for company or not. Planning methods of approaching decides whether company going to effective investment or not. Highly concentration on structure of ownership is mandatory. Any company must utilize competition and discount facilities provided by IPO (Hauser, Yaari, Tanchuma, & Baker, 2006).
IPO openly discloses information to the public and offers competitive pricing because investors are interested in discount offerings. It gives clear about differences between extra price that obtained in initial stage and offer price. Discount mainly gives to issue price and mainly helpful for aggressive IPO price. In addition to this, discounts are useful for alluring investors who have potential to invest and build demand for stocks of company. By giving shares at discount, companies are able to produce more interest as well as more capital. This leads to creating positive responses and enhancing perceived company value.
Conclusion
Companies use financial analysis models to gather information on opportunities, profitability, challenges, financial statements, and worthiness for business growth and competing in high marketing demand. For giving all that data, it used tool called financial model that helped in assisting to produce financial situations of company by predicting outcomes and estimating future situations that drive venture to make decisions strategically and reduce risks. In addition, initial public offering is method involving process when company exposes its shares publicly for first time. It gave various benefits including listing gains, raising capital, increasing liquidity, giving fair opportunities for retailers etc. Countries like Japan, China, USA and Western Europe benefitted with help of IPOs and enhanced their market capital.
For this, IPO used mechanisms of underpricing, signaling and asymmetry of data. However, gave multiple benefits, it included drawbacks involving difficulty in pricing, heavily hinged on demand of market, expensive, need of regulation is high and exposing information publicly. IPO provides various opportunities and benefits in development of company from very initial stages. A venture is helped increase capital and grow an organization by conducting the process of an IPO, examining company risks, and making strategic decisions. By using discount facility of IPO, companies got reputation and enhanced capital.
References
Alshowishin, A. (2021). Financial Analysis. International Journal of Scientific and Research Publications, 11(4), 208-211.
Benninga, S., Helmantelc, M., & Sarig, O. (2023). The timing of initial public offerings. Journal of Financial Economics, 75(1), 115-132.
Brau, J. C., & Fawcett, S. E. (2006). Initial public offerings: An analysis of theory and practice. The Journal of Finance, 61(1), 399-436.
Hauser, S., Yaari, U., Tanchuma, Y., & Baker, H. (2006). Initial Public Offering Discount and Competition. The Journal of Law and Economics, 49(1), 331-351.
Mohta, P. (2023, January 25). Benefits of Investing in Initial Public Offering (IPOs)? Retrieved from Wint: https://www.wintwealth.com/blog/benefits-of-investing-in-an-initial-public-offering/
Pesterac, A. (2020). The Importance of Initial Public Offering for Capital Market Development in Developing Countries. Economic Themes, 58(1), 97-115.
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