By Darren Chervitz, CBS MarketWatch

Working capital deficit -- This is when a company's liabilities, or debts, are greater than its assets. This is not uncommon for a new issue, but it should be explained and should disappear on an "as adjusted" basis after the completion of the offering. Details can be found in "Summary Consolidated Financial Data" and an explanation is in "Liquidity and Capital Resources."

Other financial red flags -- A number of other problems can be found on a company's balance sheet or income statement. Things such as inventories or accounts receivable rising more rapidly than revenue, high interest expenses, or extraordinary charges should be explained. Found in "Selected Consolidated Financial Data" with more detail in the "Index to Consolidated Financial Statements."

Over-reliance on one customer -- A clear danger sign. Several IPOs have imploded after the companies announced they were losing one of their major customers. Of course, like all of these warning signs, there are exceptions. Found in "Risk Factors."

Supplier reliance -- A company can be too reliant on its suppliers as well as its customers. Make sure a firm can switch from one supplier to another rather easily. Suppliers that double as competitors are another danger. Found in "Risk Factors."

Competition -- Given that monopolies are illegal, competition will always be there, but you better watch out if some well-run, well-capitalized firms are on the list. One name that jumps quickly to mind: Microsoft. Found in "Risk Factors" and "Business."

Other risk factors -- Patent disputes, heavy indebtedness, and litigation are just some of the other more dangerous risks. Read the entire "Risk Factor" section carefully, but don't get overly discouraged.

Too-small pie -- No matter how effective a company is at selling widgets, there needs to be enough people willing to buy those widgets at high-enough

prices. A company's target market should be large and rapidly growing. This information can be found in the "Business" section.

Declining valuation -- Pre-offerint an IPO be priced so they get a huge return on their initial investment, often as much as 10 times. You can find out what those original investors paid on average for their shares in the section entitled "Dilution." Compare that to the offering price. If the two prices are close, then you can bet pre-IPO investors at one point were too optimistic about the valuation for the company. While it may seem like a good deal to buy a company for about the same price as earlier investors, there's a reason for the lower valuation. On very rare occasions, IPO investors can actually pay less on average than the company's pre-offering backers.

Overvaluation -- A lot of factors go into determining an IPO's offering price and not all of them have to do with the price-to-sales or price-to-cash flow multiples that determine the value of most other stocks. Unfortunately, professional investors are at an advantage since they can often find out a company's sales and earnings projections. As a regular retail investor, you won't get any future estimates until analysts start covering the new issue about 25 days after the stock starts trading. Still, you can compare how companies are valued to past results. Just take the number of shares outstanding after the offering, multiply it by the expected offering price (take the midpoint of the listed pricing range), and find out what the market value of the company will be. Then, divide that figure by the firm's revenue and profit for the past four quarters. Hopefully, these multiples, although rough calculations, will be comparable to similar publicly traded companies. Number of shares outstanding is found in "The Offering," expected offering price range is usually found on the front page (but it is not always there), and quarterly sales results are usually found in "Selected Consolidated Financial Data" (if quarterly results are not available, use results from the most recent fiscal year).

Overcompensated or overmatched management -- You usually don't want members of the management team in a newly public firm to be making hundreds of thousands of dollars in base salary. Rewards are fine, but make sure most of them are in the form of stock options. That way, management will only be rewarded if the shareholders are. Also, look for a management team that has extensive experience in the industry and/or with other public companies. A chief financial officer with little experience running a public company could be overwhelmed by the duties. In addition, watch out for an executive team or board of directors filled with relatives. Nepotism rarely makes for solid management. Found in "Management" and "Executive Compensation."

"Going concern" statement -- If a company's accountant says that the firm's business results raise "substantial doubt about the firm's ability to continue as

a going concern," watch out. It usually means that a company needs the IPO pretty badly to continue paying off its obligations. Many companies avoid getting plagued with this scarlet letter by raising money immediately prior to the IPO. Found in "Report of Independent Auditors."