How to read an offer document without a finance degree
Six things to find in a 200-page prospectus, and what to do if you cannot find them.
1. What the money is for
Look for 'use of proceeds'. If the money funds new capacity, that is growth. If it mostly repays existing debt or buys out earlier owners, that is a different story — not automatically bad, but you should know which one you are backing.
2. Who is selling
New shares mean money goes into the company. Existing shares mean money goes to the current owners. Many offers are a mix, and the split is stated.
3. What it earns today
Find revenue and profit for the last three years. A company that has never made a profit is asking you to believe a story about the future. That is allowed; just know that is what you are buying.
4. What it owes
Debt levels and repayment dates. Heavy debt with near-term maturities is the most common way a good business becomes a bad share.
5. The risk factors
This section is written by lawyers to protect the company, which is exactly why it is honest. Currency exposure, regulation, dependence on one customer or one plant — it is all listed.
6. The lock-up
Whether existing owners are barred from selling for a period after listing, and for how long. When a big lock-up expires, supply hits the market.
The one thing to remember
If a document does not clearly state use of proceeds, financial history and risks, that absence is your answer.
