Which IPO to Choose in 2025: Selection Checklist and Key Issuer Metrics

Which IPO to Choose in 2025: Selection Checklist and Key Issuer Metrics

Initial public offerings (IPOs) provide investors access to promising companies at the early stages of public development. However, high returns during the initial trading days can quickly turn into steep declines if key evaluation factors are overlooked. In 2024, the first nine Russian IPOs resulted in losses for investors of up to 60%, highlighting the critical importance of a systematic approach to selecting offerings. The performance of a number of stocks was two to three times worse than the dynamics of the Moscow Exchange Index, with many shares beginning to drop within hours of trading commencement.

History provides numerous examples where high-profile names and ambitious plans did not shield from failure. The filling station company “EuroTrans,” which commenced public operations at the end of 2023, delivered an unpleasant surprise to investors: from January 2024, its shares plummeted by 75%, from a peak of 480 roubles to 120 roubles. The management promised to buy back shares at 350 roubles, yet this statement was never substantiated with official documentation. This article presents a practical guide for assessing IPOs with specifics on metrics, norms, and a checklist to support informed investment decisions.

Financial Metrics: Foundations of Assessment

Analysis of the issuer's financial performance begins with examining revenue history over the past 2-3 years, where steady double-digit growth indicates sustained demand for the company's products or services. Critically, it is essential to compare the issuer's growth rates with key competitors: anomalous differing from average industry indicators necessitates scrutiny for one-off events, such as large contracts or mergers that may not recur in the future. The EdTech startup Rubytech, gearing up for a stock market debut with a valuation of 15 billion roubles, demonstrates a 40% annual revenue growth driven by the expansion of online education and corporate training.

Operational Efficiency

EBITDA margin and profitability act as indicators of a company’s operational efficiency, and these figures should be interpreted within an industry context. If the issuer's margin significantly exceeds the industry's, it is essential to clarify the source of the advantage - whether technological superiority, economies of scale, or temporary factors such as deferred costs. Poor profitability signals issues with cost control and may indicate structural weaknesses in the business model that will become apparent post-IPO.

Debt Load and Financial Stability

Debt load remains one of the most critical indicators when assessing an IPO, as it determines a company’s financial resilience in various economic scenarios. The Debt/EBITDA ratio should not exceed 3-4× for stable industries such as utilities, transport, or retail. Ratios between 0 and 3 indicate low debt levels, suitable for most firms. A 3 to 6 range characterises fast-growing businesses like IT companies or marketplaces that require significant upfront investments in infrastructure and development.

Debt/EBITDA ratios exceeding 6 signal a high debt burden and demand heightened caution, as the company may face challenges in refinancing or rising interest rates. It is vital to check the debt repayment schedule in the prospectus: a peak payment obligation in the coming years may reduce free cash flow and elevate default risks. Free cash flow (FCF) illustrates what resources remain with the company after all operational and capital expenditures and can be directed towards dividends or reinvestment in development.

Valuation Multiples: The Language of Comparison

Valuation multiples allow for comparisons among companies of varying sizes and determine whether the issuer is trading at a fair, overvalued, or undervalued price relative to its peers. The P/E (Price to Earnings) ratio reveals how much investors are willing to pay for one unit of the company’s net profit. If one company has a P/E of 5 and another a P/E of 15, the former is theoretically quicker to recoup its investment under equal conditions. However, this metric does not consider the company’s debt, profit growth rates, or earnings quality, making it insufficient for sole reliance.

Sector-Specific P/E Characteristics

For IT companies, high P/E values are considered normal due to expectations for rapid growth, whereas mature sectors such as utilities typically feature low values. The financial sector in Russia exhibits an average P/E range of about 5-7, with minimum values potentially dropping to 2 and maximums reaching 20 for the most promising banks and insurers. It is crucial to remember that low multiples in an IPO context might indicate hidden business issues that investors are not yet aware of.

Comprehensive Evaluation through EV/EBITDA

EV/EBITDA (Enterprise Value to EBITDA) is a more reliable multiple that accounts for the company’s debt load, providing a more objective view of business value. Enterprise Value (EV) is calculated as market capitalisation plus total debt minus cash and cash equivalents. If a company is valued at 10 billion roubles (market capitalisation), carries 3 billion roubles in debt, and holds 1 billion roubles in cash, then EV = 10 + 3 - 1 = 12 billion roubles.

The EV/EBITDA ratio indicates how long it will take to recoup the company's value at the current level of earnings, making it especially useful for comparing companies with differing capital structures. If a company’s EV/EBITDA is lower than its competitors' and the industry average, it may suggest undervaluation, presenting opportunities for investors. Conversely, an overvalued situation, particularly dangerous during an IPO where historical trading does not exist to correct the price, indicates caution.

P/S for Assessing Growth Companies

The P/S (Price to Sales) ratio becomes an indispensable tool for evaluating unprofitable companies that have yet to achieve profitability but demonstrate rapid revenue growth. Average P/S values in the Russian market vary significantly by sector: the IT sector averages around 10.36, indicating high growth expectations, while retail stands at just 1.10, due to low business margins. A high revenue figure does not always correlate with high profitability — certain companies operate at low margins or incur losses while financing aggressive expansions.

Prospectus Analysis: Reading Between the Lines

The prospectus is a legal document typically ranging from 100 to 300 pages, containing all substantial information about the company, risks, and terms of the offering. Key sections for investors include business and competitive landscape descriptions, financial reports according to IFRS for the past 3 years, a detailed risk section, information on the use of IPO proceeds, and the shareholder structure before and after the offering.

Risk Section: A Barometer of Integrity

The risk section demands careful attention and thorough scrutiny of each point. The more detailed and honest a company is about potential threats, the higher the quality of corporate governance and transparency in communications with investors. Red flags include vague statements such as “market conditions may vary,” lack of specificity around critical risks, or an excessively optimistic tone inconsistent with industry realities.

Use of IPO Proceeds

The "Use of IPO Proceeds" section reveals the issuer’s true motivations and strategic priorities. If a company intends to direct a significant portion of funds towards debt repayment, it may indicate financial trouble and an inability to secure bank financing on acceptable terms. Preferably, proceeds should be allocated to business development: constructing new facilities, research and development, expanding geographic presence, or marketing investments to capture market share.

Audit Quality

Audited financial statements should be prepared by a reputable auditing firm from the "Big Four" (Deloitte, PwC, EY, KPMG) or well-known local auditors with an impeccable reputation. Any qualifications from the auditor, expressions of doubt regarding the company’s ability to continue operations, or refusal to express an opinion are serious red flags that should alarm any prudent investor.

Business and Team Quality

A sustainable business model features clear and diversified revenue streams, predictable cash flows, and the ability to generate profit across various market conditions. Competitive advantages, or the “economic moat,” protect the company from rivals and include unique technologies, a strong brand with high consumer loyalty, exclusive contracts, network effects, or production scale that ensures low unit costs.

Scalability and Growth

The scalability of a business defines its ability to increase revenue without proportionately increasing costs, which is crucial for rapid capital growth. IT platforms have high scalability as acquiring new users becomes cheaper as the base grows due to automation and lowering marginal costs. Conversely, manufacturing firms face limited scalability due to the need for building new facilities, hiring personnel, and investing in logistics.

Risk Diversification

Diversifying revenue channels decreases risks associated with dependence on a single product or market. Ideally, revenue should be spread across multiple products, client segments, or geographic markets. Vulnerability increases if 70-80% of revenue comes from a single customer, one product, or one region since any issues in that segment can jeopardize the entire business.

Management Team: Experience Matters

The quality of management is evaluated through the experience, education, and accomplishments of leadership in relevant fields. The presence of a CEO and CFO with successful IPO experience or management of publicly traded companies with a capitalisation exceeding $500 million is a positive indicator. It is essential to review the biographies of top managers: specialized education from leading universities, experience in sizeable corporations, and successful past projects. Founder-managers may have an intimate knowledge of the business and entrepreneurship spirit but may lack experience in public reporting, working with minority shareholders, and adhering to regulatory requirements.

Institutional support from significant funds indicates thorough due diligence on the business. The presence of representatives from pension funds, venture capital firms with a strong track record, or strategic industry investors in the board signals serious backing and reduces risks for retail investors.

Industry Context and Market Dynamics

The prospects of the issuer’s sector determine the upper limits of possible growth for the company, as even the most efficient business cannot consistently outperform the market. A market growing at 2-3% annually imposes strict constraints even on the most efficient firms, which may capture market share from competitors but fail to achieve exponential growth in valuation. Fast-growing sectors – IT, fintech, e-commerce, and green energy – present more opportunities for significant capital growth but also incur heightened competition and the risk of disruptive technologies emerging.

Target Market Size

The Total Addressable Market (TAM) indicates the theoretical potential for business expansion. A company that captures 50% of a small niche market has limited room for growth unless it plans to diversify into adjacent segments. A small market size is a red flag for investors seeking exponential capital growth over 5-10 years.

Competitive Position

Market share and the company's competitive stance determine its ability to influence pricing and terms with suppliers and customers. Market leaders with a share of 30-40% wield considerable influence over industry dynamics and can dictate terms, while companies with a sub-5% share are price-takers and must adjust to the pricing strategies of larger competitors.

Barriers to Entry

Barriers to entry for new players protect existing participants from competition and the erosion of margins. High capital expenditure required to start a business, complex regulation, the necessity for acquiring numerous licenses, protected intellectual property, or network effects - all contribute to the deterrent to new competitors and enhance the industry's investment attractiveness.

ESG: The New Reality of the Corporate World

ESG factors (Environmental, Social, Governance) have transitioned from optional criteria to mandatory components in assessing companies during IPOs, especially for large offerings involving institutional investors. Environmental indicators encompass the company's carbon footprint, waste management systems, energy-efficient production, and strategy for transitioning to a green economy with specific goals and timelines.

Social Responsibility

Social responsibility covers employee working conditions and safety, relationships with local communities in regions of operation, product safety and quality, as well as the company’s contribution to developing social infrastructure. Governance is considered the most critical component of ESG for investors, as it includes the independence and professionalism of the board, transparency of financial and non-financial reporting, and the effectiveness of internal controls and auditing.

Independent Directors

The presence of independent directors on the board is a sign of mature corporate governance and the company’s readiness for public status. Ideally, at least one-third of board members should be independent professionals who have no conflict of interest with management or significant shareholders. The presence of representatives of large institutional investors indicates thorough pre-issue scrutiny and reduces information asymmetry.

Impact of ESG on Valuation

ESG ratings from recognised agencies can significantly influence a company's valuation during an IPO and its access to capital. Research shows that companies with high ESG scores exhibit less undervaluation at issuance and better long-term performance due to a broader base of institutional investors. Greenwashing – claiming ESG commitment without real actions and supporting data – can be readily identified through a detailed analysis of non-financial reporting and comparison of statements with actual performance indicators.

Offering Structure and Issuer Motivation

The price range for an IPO is determined during the book-building phase based on demand from institutional investors and comparisons with traded peers. An offering at the upper end of the range may indicate high interest in the company, but it also raises the possibility of overvaluation and a desire to maximize capital raised at the expense of investor interests. Conversely, an offering at the lower end signals weak demand or a conservative approach from underwriters, who prefer to ensure the offering’s success with a lower price.

Free-float and Liquidity

Free float – the proportion of shares available for trade – is critical to secondary trading liquidity and investors’ ability to enter and exit positions without significantly impacting the price. Minimum requirements are 5% for the second-tier listing on the SPB Exchange and 10% for the first tier on the Moscow Exchange. Low free float (below 10%) poses risks of low liquidity and high price volatility, where even small orders can move the market by several percentage points.

Lock-up Period

The lock-up period – the timeframe in which insiders and major shareholders are prohibited from selling shares – typically ranges from 90 to 180 days and is designed to ensure price stability in the months following the offering. A short lock-up (less than 90 days) or its absence is a red flag indicating major shareholders wish to exit the business quickly and secure profits. The end of a lock-up often coincides with a price drop of 10-30% due to increased supply of shares in the market.

Primary Issuance vs Sale of Shares

The offering structure may involve either the primary issuance of new shares or the sale of existing shares by current shareholders, which has different implications. Primary issuance increases the company's capital and directs funds to its development but dilutes the share of existing shareholders. The sale of shares by shareholders yields cash for the sellers, not the company, which may indicate their desire to secure profits at peak valuation.

Lessons from Failures: What Went Wrong

The history of unsuccessful offerings offers valuable lessons for investors. The company CarMoney, which provides vehicle-collateral loans, became the second example of a failed IPO in 2024 following initial excitement. The Chinese company Xiaomi conducted an offering on the Hong Kong Stock Exchange on July 9, 2018, at a price of 17 Hong Kong dollars, but within the first hours of trading, shares began to decline. After a brief rise over a couple of weeks, the stock fell back to 8.28 Hong Kong dollars, only reaching the IPO price again in July 2020. The causes of the decline were the overvaluation of the company upon its market debut and the ongoing trade conflict between the USA and China.

Saudi Aramco: Size Doesn't Guarantee Stability

The Saudi oil company Saudi Aramco conducted the largest and contentious IPO, selling just 1.5% of shares and raising $29.4 billion at a business valuation of $2 trillion. On the day of sales commencement, shares reached 35.2 riyals, peaking at 38.7 riyals; however, fluctuations began with periodic declines. This demonstrates that even the largest global corporations are not immune to volatility post-offering.

Palantir: A Success Story

Successful IPOs also provide valuable benchmarks. The American company Palantir, which works with big data analytics for the CIA, FBI, and major banks, achieved a successful offering due to clear positioning, unique technologies, and a comprehensible business model. A key factor in its success was the presence of long-term contracts with government agencies and significant businesses that ensured predictable cash flows.

Practical Checklist: Systematising the Approach