“Cash flow is a very underrated statement.”
That’s how our conversation with Prasad, a well-respected guest on the Big Bull Podcast, began.
We were discussing IPOs and how retail investors often get trapped in the wrong companies. I asked him bluntly:
“Why do you think this keeps happening?”
“Incomplete analysis,” he replied instantly.
What Retail Investors Usually Look For
Prasad explained that most retail investors have a very limited checklist:
- Subscription rate: If it’s going high, they jump in.
- Income statement: A few, with some knowledge, look at the revenue and profits.
But almost nobody checks the cash flow statement, which, ironically, is one of the most powerful indicators of a company’s financial health.
The Eye-Opening Story Post-COVID
Prasad shared a story from the post-COVID IPO rush.
“One company was launching its IPO,” he said. “I checked their financials. On the surface, it looked great. Strong profits, decent growth—just the kind of thing that excites retail investors.”
But something didn’t sit right with him.
“Other companies in the same industry weren’t growing. Most were struggling to sustain. But this one company seemed like it was at its peak.”
Curious, he decided to dig deeper.
“A PR agency got me in touch with the company. When I asked them some direct questions, they couldn’t give a clear answer. I could sense the tremble in their voice.”
That’s when he turned to the cash flow statement.
What the Cash Flow Revealed
Despite showing growing profits on the income statement, the company’s operating cash flow was stagnant or declining for the last 4–5 years.
“It was a red flag. I realized they weren’t generating real cash despite all those profits.”
Fast forward to today, the company is struggling, and many retail investors who blindly trusted the income numbers are stuck with their investment.
The IPO Subscription Trap
Another trick that manipulates retail perception?
Subscription rate manipulation.
Prasad explained, “If the IPO isn’t getting enough interest, they quietly push the subscription 8- 9x on the second or third day. This creates artificial demand and FOMO (Fear of Missing Out).”
He continued, “Such IPOs often give 80–95% listing gains, but after that… It’s a trap. Prices drop, and the later investors are left holding the bag.”
How Much Operating Cash Flow Is Ideal?
Curious, I asked, “What’s an ideal operating cash flow value?”
“It should be around 10–20% of the reported profit,” he said.
“But profits can be manipulated, too, right?” I interjected.
“Exactly,” he agreed. “Companies can inflate revenue by raising invoices that haven’t even been cleared yet. That’s why I always check: Is the company generating cash from its operations?
If not, that’s your cue to run.
The Dividend Illusion
I asked, “Are there other ways companies lure retail investors after listing?”
“Dividends,” he said.
He brought up Vedanta and Hindustan Zinc as examples.
“They’re offering dividends even higher than their profits. That sounds generous—but why aren’t they reinvesting their profits?”
So he dug deeper.
“Turns out, both companies have the same parent, Vedanta Resources. And that parent company is drowning in $13 billion of debt. These dividends? Just a way to attract more retail investors to cover that debt.”
What Retail Investors Should Look For
According to Prasad, here’s what every smart retail investor must consider before investing in an IPO:
Checklist Before You Invest:
- Operating cash flow — The real measure of profitability.
- Company’s management — Their history, vision, and integrity.
- Products & services — Are they relevant and competitive?
- Competitive analysis — How are peers performing?
- Company debt — High debt is a red flag.
- IPO valuation & first-day subscription rate — Don’t fall for hype.
- News & history — Google past news, not just headlines.
Final Words: Don’t Follow the Crowd, Follow the Cash
IPO investing isn’t a lottery ticket—it’s a long-term financial decision.
The next time you hear about a “hot IPO,” don’t just look at profits and subscription numbers. Ask the harder question:
Is this company actually generating real cash, or just cooking the books?
Because at the end of the day, cash flow doesn’t lie—but a profit statement sometimes does.
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