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

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

An initial public offering (IPO) provides investors access to promising companies at an early stage of public development, but the high returns of the first trading days can turn into steep declines if key evaluation factors are overlooked. In 2024, the first nine Russian IPOs resulted in losses of up to 60% for investors, highlighting the critical importance of a systematic approach to selection. The stock price dynamics of several companies were found to be 2-3 times worse than the dynamics of the Moscow Exchange Index, with many stocks starting to decline within hours of trading.

History is rife with examples where high-profile names and ambitious plans have not saved companies from failure. The fuel station company "EuroTrans," which began public operations in late 2023, surprised investors with an unpleasant twist: from January 2024, its shares plummeted by 75%, from a peak of 480 rubles to 120 rubles. Management promised to repurchase shares at 350 rubles, but this statement was never backed up by official documents. This article presents a practical guide to evaluating IPOs with specific metrics, standards, and a checklist for making informed investment decisions.

Financial Metrics: The Foundation of Evaluation

An analysis of the issuer's financial indicators begins with studying its revenue history over the last 2-3 years, where stable double-digit growth indicates strong demand for the company's products or services. It is critically important to compare the issuer's growth rates with key competitors: any anomalous increase above industry averages requires verification for one-off events like large contracts or mergers that may not recur in the future. The EdTech startup Rubytech, preparing to go public at a valuation of 15 billion rubles, demonstrates a revenue growth rate of 40% annually, thanks to the expansion of online education and corporate training.

Operational Efficiency

EBITDA margin and profitability serve as indicators of the company's operational efficiency, and these metrics must be considered in the industry context. If the issuer's margin is significantly higher than the industry average, it is essential to clarify the source of this advantage—whether it is due to technological superiority, economies of scale, or temporary factors like deferred expenses. Poor profitability signals cost control problems and may indicate structural weaknesses in the business model that will become apparent post-listing.

Debt Load and Financial Stability

The debt load remains one of the most critical indicators when evaluating an IPO, as it determines the company's financial stability across various economic scenarios. The Debt/EBITDA ratio should not exceed 3-4x for stable industries such as utilities, transport, or retail. Values from 0 to 3 indicate low debt levels, which are optimal for most companies. Ratios from 3 to 6 are typical for rapidly growing businesses like IT companies or marketplaces that require significant one-time investments in infrastructure and development.

Debt/EBITDA ratios above 6 signal a high debt burden and require particular caution, as the company may encounter difficulties with refinancing or rising interest rates. It is essential to check the debt repayment schedule in the offering prospectus: a peak in repayments over the next few years can reduce free cash flow and increase default risks. Free cash flow (FCF) indicates the funds remaining after all operating and capital expenditures, which can be directed towards dividends or reinvestment in growth.

Valuation Multiples: The Language of Comparison

Multiples allow for the comparison of companies of various sizes and determine whether the issuer is trading at a fair, overvalued, or undervalued price relative to peers. The P/E (Price to Earnings) ratio shows how much investors are willing to pay for one ruble of the company's net profit. If one company has a P/E of 5 and another has a P/E of 15, the first is theoretically expected to recoup its investment faster, all other things being equal. However, this metric does not account for the company's debt, growth rates, and earnings quality, so it is insufficient to rely on it alone.

Industry-Specific P/E Characteristics

High P/E values are normal for IT companies due to expectations of rapid growth, while mature sectors like utilities typically exhibit low P/E values. The financial sector in Russia shows an average P/E of around 5-7, with minimum values dropping to as low as 2 and maximum values reaching 20 for the most promising banks and insurers. It is important to remember that low multiples when evaluating an IPO may indicate hidden issues in the business that investors are not yet aware of.

Comprehensive Evaluation through EV/EBITDA

EV/EBITDA (Enterprise Value to EBITDA) is a more reliable multiple that considers the company's debt load and provides a more objective picture of its value. Enterprise Value (EV) is calculated as market capitalization plus total debt minus cash and cash equivalents. If a company is worth 10 billion rubles (capitalization), has debts of 3 billion rubles, and cash of 1 billion rubles, then EV = 10 + 3 - 1 = 12 billion rubles.

The EV/EBITDA value indicates how long it will take to recover the company's value at its current earnings level, making it especially useful for comparing companies with different capital structures. If a company's EV/EBITDA is lower than that of competitors and the industry average, it may suggest undervaluation, creating opportunities for investors. Conversely, a higher value indicates overvaluation, which is particularly dangerous during an IPO, when there is no trading history to correct the price.

P/S for Valuation of Growing Companies

The P/S (Price to Sales) multiple becomes an indispensable tool for evaluating unprofitable companies that have not yet turned a profit but demonstrate rapid revenue growth. Average P/S values for the Russian market vary dramatically across sectors: the IT sector shows 10.36, reflecting high growth expectations, while retail has only 1.10 due to the low margins of the business. A high revenue figure does not always indicate high profitability—some companies operate on thin margins or incur losses while financing aggressive expansion.

Prospectus Analysis: Reading Between the Lines

The offering prospectus is a legal document that can range from 100 to 300 pages, containing all significant information about the company, risks, and terms of the offering. Key sections for an investor include a description of the business and competitive environment, IFRS financial statements for the last 3 years, a detailed risk section, information on the use of IPO proceeds, and the shareholder structure before and after the offering.

Risk Section: The Honesty Barometer

The risk section requires particular attention and thorough examination of each item. The more detailed and honest the company is about potential threats, the higher the quality of corporate governance and transparency in communications with investors. Red flags include vague phrases like "market conditions may change", lack of specificity regarding critical risks, or overly optimistic tones that do not align with the industry reality.

Use of IPO Proceeds

The "Use of IPO Proceeds" section reveals the issuer's true motivations and strategic priorities. If a company plans to allocate a significant portion of the funds to pay down debt, it may signal financial issues and an inability to secure bank financing on acceptable terms. It is preferable when funds are directed towards business development: building new capacities, research and development, expanding geographical 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 established local auditors with an impeccable reputation. The presence of audit qualifications, expressions of doubt regarding the company's ability to continue as a going concern, or refusal to express an opinion—a significant red flag—should halt any prudent investor.

Business Quality and Team

A sustainable business model possesses clear and diversified revenue sources, predictable cash flows, and the capacity to generate profit across various market conditions. Competitive advantages, or the "economic moat," protect the company from rivals and may include unique technologies, strong brand loyalty, exclusive contracts, network effects, or production scale that ensures low costs.

Scalability and Growth

Business scalability defines a company's ability to increase revenue without proportional growth in costs, which is crucial for rapid capital appreciation. IT platforms possess high scalability, as acquiring new users becomes cheaper as the base grows, thanks to automation and decreasing unit costs. Manufacturing companies have limited scalability due to the need to build new facilities, hire personnel, and invest in logistics.

Risk Diversification

Diversifying revenue channels mitigates dependence on a single product or market. Ideally, revenue is spread across multiple products, customer segments, or geographical markets. Vulnerability increases if 70-80% of revenue comes from a single client, product, or region, as 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 the leadership in relevant fields. The presence of a CEO and CFO with successful IPO experience or management of public companies with a capitalization of over 500 million dollars is a positive signal. It is important to examine the biographies of top managers: relevant education from prominent universities, experience in large corporations, and successful past projects. Founder-led managers may know the business inside out and exhibit entrepreneurial spirit but may lack experience in public accountability, working with minority shareholders, and adhering to regulatory requirements.

Institutional support from large funds indicates thorough due diligence on the business. The involvement of pension fund representatives, venture capitalists with a longstanding track record, or strategic investors from the industry in the board of directors signifies serious backing and reduces risks for retail investors.

Industry Context and Market Dynamics

The growth prospects of the issuer's industry establish the upper limits of the company's potential growth, as even the most efficient business cannot consistently outperform the market. A market with growth rates of 2-3% per year severely restricts even the most effective companies, which may gain share from competitors but cannot create exponential value growth. Fast-growing industries—such as information technology, fintech, e-commerce, and green energy—offer more opportunities for multiple capital growth but also involve increased 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 has already captured 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 multiple capital growth over 5-10 years.

Competitive Position

The company's market share and competitive position determine its ability to influence prices, working conditions with suppliers, and customer terms. Market leaders with shares of 30-40% have significant sway over industry dynamics and can dictate terms, while companies with shares below 5% are price-takers compelled to adjust to the pricing policies of larger players.

Barriers to Entry

Barriers to entry for new players protect existing participants from competition and the dilution of margins. High capital costs for starting a business, complex regulations, and the need for multiple licenses, proprietary intellectual property, or network effects—all make it difficult for new competitors to emerge and enhance the attractiveness of the industry for investments.

ESG: The New Reality of Corporate World

ESG factors (Environmental, Social, Governance) have transformed from optional criteria into an essential component of evaluating companies during IPOs, especially for large placements involving institutional investors. Environmental metrics include the company's carbon footprint, waste management system, energy efficiency in production, and transition strategy towards a green economy with specific targets and timelines.

Social Responsibility

Social responsibility encompasses labor conditions and employee safety, relationships with local communities in regions of operation, product safety and quality, as well as the company's contribution to building social infrastructure. Corporate governance (Governance) is viewed as the most crucial component of ESG for investors, as it includes the independence and professionalism of the board of directors, transparency in financial and non-financial reporting, and the effectiveness of internal control and audit systems.

Independent Directors

The presence of independent directors on the board is a hallmark of mature corporate governance and indicates the company's readiness for public status. Ideally, at least one-third of the board members should be independent professionals without conflicts of interest with management or major shareholders. The involvement of representatives from major institutional investors indicates thorough due diligence and mitigates information asymmetry.

Impact of ESG on Valuation

An ESG rating from recognized agencies can significantly influence a company's valuation during an IPO and its access to capital. Studies show that companies with high ESG ratings exhibit less undervaluation during placements and better long-term stock performance due to a broader base of institutional investors. Greenwashing—declaring ESG commitment without real actions and supporting data—is easily identified through thorough analysis of non-financial reports and comparing statements with actual performance metrics.

Placement Structure and Issuer Motivation

The price range of an IPO is determined during the book-building process based on institutional investors' demand and comparison with tradable analogs. Pricing at the upper end of the range may signal high interest in the company but may also indicate potential overvaluation and the desire to maximize fundraising at the expense of investors' interests. Pricing at the lower end indicates weak demand or a conservative approach from underwriters, who prefer to ensure placement success at a lower price.

Free-Float and Liquidity

Free float—the share of shares in free circulation—is critical for secondary trading liquidity and allowing investors to enter and exit positions without significantly impacting the price. Minimum requirements are 5% for the second-level listing on the SPB Exchange and 10% for the first level on the Moscow Exchange. A low free float (below 10%) creates risks of low liquidity and high price volatility, where even small orders can move the market several percentage points.

Lock-Up Period

The lock-up period—a prohibition on selling shares for insiders and major shareholders—typically lasts from 90 to 180 days and aims to ensure price stability in the first months after the offering. A short lock-up (less than 90 days) or absence of one is a red flag, indicating the major shareholders' desire to quickly exit the business and take profits. The expiration of the lock-up often coincides with declines in stock prices of 10-30% due to increased share supply in the market.

Primary Issuance vs. Share Sale

The placement structure may involve a primary issuance of new shares or the sale of existing shares by current shareholders, which has different implications. A primary issuance increases the company's capital and directs funds towards its development but dilutes the existing shareholders' stakes. Selling shares by shareholders generates proceeds for sellers, not for the company, which may signal their desire to take profits at a peak valuation.

Lessons from Failures: What Went Wrong

The history of unsuccessful placements offers valuable lessons for investors. The company CarMoney, providing car-backed loans, marked the second example of a failed IPO in 2024 after an initial hype. Chinese Xiaomi conducted its placement on the Hong Kong stock exchange on July 9, 2018, at a price of 17 Hong Kong dollars, but shares began to decline within hours of trading. They subsequently rose for a few weeks but then fell back to 8.28 Hong Kong dollars, only reaching the offer price again by July 2020. The reasons for this decline included overvaluation at the IPO and the trade conflict between the US and China.

Saudi Aramco: Size Is Not a Guarantee

The Saudi oil company Saudi Aramco conducted the largest and most controversial IPO, selling only 1.5% of shares and raising $29.4 billion at a business valuation of $2 trillion. On the day of the sale's launch, shares reached 35.2 riyals, peaking at 38.7 riyals, but then began to fluctuate with periodic declines. This demonstrates that even the largest global companies are not immune to post-listing volatility.

Palantir: A Model of Success

Successful IPOs also provide valuable benchmarks. The American company Palantir, which provides big data analytics to the CIA, FBI, and major banks, conducted a successful offering due to clear positioning, unique technologies, and a straightforward business model. Key to its success was the presence of long-term contracts with government agencies and large businesses that ensured predictability of cash flows.

Practical Checklist: Systematizing the Approach