Short answer: An initial public offering (IPO) is the first sale of a company’s shares to the public. The company and its investment bankers or underwriters, the firms that manage the sale, set the price range after examining its financials, growth prospects and expected investor demand. Two broad methods inform that range, and both rest on assumptions that can turn out wrong.
Last reviewed: 10 November 2026
At a glance
| Method or factor | What it measures | Main catch |
|---|---|---|
| Absolute valuation (discounted cash flow) | Intrinsic worth, from projected future cash flows discounted to present value | Future cash flows are uncertain, and choosing a discount rate is complicated |
| Relative valuation | Value set by comparing the company with similar companies | Results depend on which companies are treated as similar |
| Price-to-earnings ratio | Share price divided by earnings per share | Only as informative as the earnings figure it divides by |
| Enterprise value and price-to-EBIT | Total company value, and that value compared with EBIT (earnings before interest and tax) | Requires comparable figures from peers, which may not match |
| Industry comparables | Share prices and market capitalisations of listed peers in the same sector | Listed peers may differ in size, debt or growth |
| Investor demand | Interest from institutional and retail investors | Treated as the most important factor, but known only as the offer proceeds |
Who sets the IPO price range?
The company and its bankers or underwriters set a price range, which is a band of possible prices rather than one fixed figure. To set it, they look at the company’s financials, such as revenue and profit, along with its growth prospects. They also estimate how much investors are likely to want the shares.
The range reflects the judgement of the people who prepared it. Anyone reading it should ask which assumptions sit behind each number.
What is absolute valuation?
Absolute valuation estimates a company’s intrinsic worth, meaning what the business is worth on its own, without reference to other companies. It works by projecting the company’s future cash flows, the actual cash the business is expected to generate, and then discounting them to present value. Discounting means shrinking future amounts using a discount rate, so that they show what they are worth in today’s rupees.
The most common version is discounted cash flow (DCF) analysis. It is conceptually simple, but it is hard in practice for two reasons. Future cash flows are uncertain, so a forecast made before listing can be far off. And choosing a suitable discount rate is complicated, since the result is sensitive to that rate.
What is relative valuation?
Relative valuation sets a company’s value by comparing it with similar companies. Instead of forecasting cash flows, it uses ratios that compare price with a measure of financial performance. The most widely known is the price-to-earnings (P/E) ratio, which divides the share price by earnings per share, or profit per share. A P/E of 20 means investors pay Rs 20 for each rupee of annual profit.
Other ratios include enterprise value, which is a company’s total value adjusted for debt and cash, and price-to-EBIT, which compares that value with operating profit. Each ratio is only as useful as the choice of comparison companies. If the peers are not truly similar, the ratio can mislead.
How do industry comparables work?
Industry comparables use the share prices and market capitalisations of already-listed peers in the same sector as a benchmark for the new issue. Market capitalisation, or market cap, is a company’s share price multiplied by its total number of shares. Listed peers give a reference point for what investors currently pay for businesses like the one being offered.
The catch is that no two companies are identical. A peer may be larger, more indebted or growing at a different pace. Applying its valuation to the new company without adjustment can overstate or understate what the IPO is worth.
Why does investor demand carry so much weight?
Demand from both institutional investors, which are large bodies that invest pooled money, and retail investors, who are individuals buying for themselves, is treated as the most important factor in valuing an IPO. Strong demand can push the final price towards the upper part of the range, while weak demand can pull it down.
The limitation is timing. Demand is only fully visible while the offer is open, so it cannot be measured before the price is set. Heavy demand also shows enthusiasm, not proof that the price is justified by the company’s cash flows or earnings.
A hypothetical worked example
The figures below are invented for illustration and do not describe any real company.
Suppose a hypothetical company earns a profit of Rs 10 crore in a year and has 1 crore shares in issue. Its earnings per share are Rs 10 (Rs 10 crore divided by 1 crore shares). If comparable listed peers trade at a P/E of 20, the implied share price is Rs 200 (Rs 10 multiplied by 20). That makes the hypothetical market capitalisation Rs 200 crore (Rs 200 multiplied by 1 crore shares).
Now change one assumption. If the peers instead trade at a P/E of 15, the implied price falls to Rs 150. The choice of comparison set alone moves the answer by Rs 50 per share, which is why the choice of peers matters so much.
What are the main risks in an IPO valuation?
Every method depends on assumptions: future cash flows, a discount rate, a set of peers, or an expected level of demand. Small changes in those assumptions can produce large changes in the result. A price range is therefore a set of estimates, not a measurement.
Past prices of listed peers may also reflect conditions that have since changed. Investor demand can rise or fall before and after listing. Understanding these inputs helps you see what a valuation depends on, and where it could be wrong.
Frequently asked questions
Does a high IPO price range mean the company is worth more?
Not by itself. The range is set by the company and its bankers after they examine financials, growth prospects and expected investor demand, so it reflects their judgement.
Why is investor demand so important in valuing an IPO?
Demand from institutional and retail investors is treated as the most important factor in valuing an IPO. It is known only while the offer is open, so it cannot be measured in advance.
Is discounted cash flow analysis easy to apply to a new listing?
No. Future cash flows are uncertain, and choosing a suitable discount rate is complicated.
What do industry comparables compare?
They compare the new issue with already-listed peers in the same sector, using their share prices and market capitalisations as a benchmark.
Sources and last check
Facts in this article were checked against the sources below on 10 November 2026. Rules and figures can change; check the primary source before acting.
- kotakneo.com (broker education)
- icicidirect.com (broker education)
- upstox.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.