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

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

An initial public offering (IPO) provides investors with access to promising companies at an early stage of public development. However, the high returns of the initial trading days can quickly turn into sharp 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 selection. The trading dynamics of several stocks were found to be 2-3 times worse than the dynamics of the Moscow Exchange Index, with many shares starting to decline within hours of the launch of trading.

History is filled with examples where high-profile names and ambitious plans did not save companies from failure. The gas station company “EuroTrans,” which began public operations at the end of 2023, delivered an unpleasant surprise to investors: starting January 2024, the company’s shares plummeted by 75%, from a high of 480 rubles to 120 rubles. The management promised a buyback of shares at 350 rubles, but this statement was never substantiated by official documents. This article presents a practical guide for evaluating IPOs using specific metrics, standards, and a checklist to make informed investment decisions.

Financial Metrics: The Foundation of Evaluation

Analysis of the issuer's financial indicators begins with studying the revenue history of the past 2-3 years, where stable growth in double-digit percentages indicates robust demand for the company's products or services. It is critically important to compare the issuer's growth rates with key competitors: anomalous excesses over average industry indicators require verification against one-off events such as large contracts or mergers, which may not recur in the future. The EdTech startup Rubytech, preparing for a public offering with a valuation of 15 billion rubles, demonstrates annual revenue growth of 40% due to the development of online education and corporate training.

Operational Efficiency

EBITDA margin and profitability serve as indicators of the company’s operational efficiency, and these indicators must be considered within the industry context. If the issuer's margin significantly exceeds the industry average, it is necessary to clarify the source of the advantage — whether it’s technological superiority, economies of scale, or temporary factors such as deferred expenses. Poor profitability signals problems with cost control and may indicate structural weaknesses in the business model that will manifest post-offering.

Debt Load and Financial Stability

The debt load remains one of the most critical indicators in IPO evaluation, as it determines the company's financial stability under various economic scenarios. The Debt/EBITDA ratio should not exceed 3-4x for stable industries such as utilities, transportation, or retail. Values between 0 and 3 indicate a low debt load, which is optimal for most companies. A ratio from 3 to 6 is typical for fast-growing businesses like IT companies or marketplaces, which require significant one-time investments in infrastructure and development.

Debt/EBITDA values above 6 signal a high debt load and require particular caution, as the company may face difficulties during refinancing or rising interest rates. It is crucial to check the debt repayment schedule in the offering prospectus: a peak in payments in the coming years may reduce free cash flow and increase default risks. Free cash flow (FCF) shows how much cash remains with the company after all operating and capital expenditures, and can be allocated for dividends or reinvested into development.

Valuation Multiples: The Language of Comparison

Valuation multiples allow for the comparison of companies of different sizes and to determine whether the issuer is trading at a fair, overvalued, or undervalued price relative to peers. The P/E (Price to Earnings) ratio indicates how much investors are willing to pay for one ruble of net profit. If one company has a P/E of 5 while another has a P/E of 15, the former is theoretically expected to recover its value faster, all else being equal. However, this metric does not account for the company’s debt, growth rates, and earnings quality, making it insufficient as a standalone reference.

Industry-Specific P/E Considerations

For IT companies, high P/E values are considered normal due to expectations of rapid growth, whereas mature industries like utilities typically exhibit low P/E values. The financial sector in Russia displays an average P/E of roughly 5-7, with minimum values dropping to 2 and maximums reaching 20 for the most promising banks and insurers. It is essential to remember that in IPO evaluations, low multiples may indicate hidden issues within the business that have yet to be uncovered by investors.

Comprehensive Valuation through EV/EBITDA

EV/EBITDA (Enterprise Value to EBITDA) is a more reliable multiple as it accounts for the company’s debt load and provides a more objective picture of the business’s worth. Enterprise Value (EV) is calculated as market capitalization plus total debt minus cash and cash equivalents. If a company is worth 10 billion rubles (market cap), 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 the payback period for the company’s valuation at the current level of profitability, making it particularly useful for comparing companies with different capital structures. If a company’s EV/EBITDA is lower than its competitors or the industry average, it may be undervalued, presenting opportunities for investors. Conversely, a higher EV/EBITDA suggests overvaluation, which is especially perilous during an IPO when no trading history exists for price correction.

P/S for Evaluating Growth Companies

The P/S (Price to Sales) multiple becomes an indispensable tool for assessing unprofitable companies that have yet to turn a profit but demonstrate rapid revenue growth. Average P/S values for the Russian market vary drastically by sector: the IT sector shows 10.36, reflecting high growth expectations, while retail sits at only 1.10 due to low business margins. A high revenue level does not always imply high profitability—some companies operate with low margins or incur losses while financing aggressive expansion.

Prospectus Analysis: Reading Between the Lines

The offering prospectus is a legal document ranging from 100 to 300 pages, containing all material information about the company, risks, and terms of the offering. Key sections for investors include business description and competitive landscape, financial statements according to IFRS 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: A Barometer of Honesty

The risk section requires special attention and careful study of each point. The more detailed and honest the company describes potential threats, the higher the quality of corporate governance and transparency in communications with investors. Red flags include vague phrases such as “market conditions may change,” lack of specificity regarding critical risks, or overly optimistic tones that do not align with industry realities.

Use of IPO Proceeds

The “Use of IPO Proceeds” section reveals the issuer's true motivations and strategic priorities. If the company intends to allocate a significant portion of funds to pay down debt, it may signal financial troubles and an inability to secure bank financing on acceptable terms. It is preferable when proceeds are directed toward business development: building new facilities, research and development, geographical expansion, or marketing investments to capture market share.

Quality of Audit

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. The presence of auditor qualifications, expressions of doubt about the company's ability to continue as a going concern, or refusal to provide an opinion are serious red flags that should halt any prudent investor.

Business Quality and Team

A sustainable business model has clear and diversified revenue sources, predictable cash flows, and the ability to generate profits in various market conditions. Competitive advantages, or “economic moats,” protect the company from competition and may include unique technologies, a strong brand with high customer loyalty, exclusive contracts, the network effect, or production scale that ensures low costs.

Scalability and Growth

The scalability of a business determines its ability to increase revenue without a proportional rise in costs, critical for rapid capitalization growth. IT platforms have high scalability since gaining a new user becomes less expensive as the base grows due to automation and reduced per-unit costs. Manufacturing companies have limited scalability due to the need to build new facilities, hire staff, and invest in logistics.

Risk Diversification

Diversifying revenue channels reduces dependency risks on a single product or market. Ideally, revenue should be spread across multiple products, customer segments, or geographical markets. Vulnerability increases if 70-80% of revenue comes from one customer, one product, or one region, as any issues in that segment could jeopardize the entire business.

Management Team: Experience Counts

The quality of management is assessed through the experience, education, and achievements of executives in relevant fields. Having a CEO and CFO with a successful track record in conducting IPOs or managing public companies with a market cap of over $500 million is a positive sign. It is crucial to review the biographies of top managers: relevant education from leading universities, experience in large corporations, and successful past projects. Founder-executives may know the business inside out and possess entrepreneurial spirit, but may lack experience with public reporting, working with minority shareholders, and adhering to regulatory requirements.

Institutional backing from major funds indicates thorough due diligence of the business. The presence of representatives from pension funds, long-established venture capital funds, or strategic investors in the board suggests significant support and reduces risks for retail investors.

Industry Context and Market Dynamics

The prospects of the issuer's industry define the upper limit of potential growth for the company, as even the most efficient business cannot outpace the market indefinitely. A market growing at 2-3% per year imposes strict limitations even on the most effective companies, which can gain share from competitors but not create exponential growth in value. Rapidly growing industries—such as information technology, fintech, e-commerce, and green energy—offer more opportunities for substantial capital appreciation but are also associated with heightened competition and the risk of disruptive technologies.

Target Market Size

The Total Addressable Market (TAM) size 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 looking for exponential capitalization growth over 5-10 years.

Competitive Position

Market share and the company's competitive position dictate its ability to influence pricing and terms with suppliers and customers. Market leaders with a share of 30-40% wield substantial influence over industry dynamics and can dictate terms, while companies with less than 5% share are price takers and must adjust to the pricing policies of larger players.

Barriers to Entry

Barriers to entry for new players protect existing participants from competition and margin dilution. High capital expenditures to start a business, complex regulations, and the necessity to obtain multiple licenses, alongside intellectual property protection or network effects, make it difficult for new competitors to emerge and enhance the sector's appeal for investment.

ESG: A New Corporate Reality

ESG factors (Environmental, Social, Governance) have evolved from optional criteria into a mandatory element of evaluating companies during IPOs, especially for large offerings involving institutional investors. Environmental indicators include the company's carbon footprint, waste management practices, energy efficiency in production, and strategies for transitioning to a green economy with specific goals and timelines.

Social Responsibility

Social responsibility encompasses labor conditions and employee safety, relations with local communities in regions of operation, safety and quality of products, and the company’s contribution to developing social infrastructure. Corporate governance (Governance) is viewed as the most critical ESG component for investors as it encompasses the independence and professionalism of the board, transparency of financial and non-financial reporting, and effectiveness of internal controls and audits.

Independent Directors

The presence of independent directors on the board signals mature corporate governance and 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 presence of representatives from large institutional investors indicates thorough due diligence and mitigates information asymmetry.

Impact of ESG on Valuation

ESG ratings from reputable agencies can greatly influence a company's valuation during an IPO and access to capital. Research shows that companies with high ESG ratings experience less underpricing upon offering and better long-term stock performance due to a broadened base of institutional investors. Greenwashing—declaring ESG commitments without real actions and supporting data—is easily identified through detailed analysis of non-financial disclosures and comparisons of claims with actual performance.

Offering Structure and Issuer Motivation

The IPO price range is determined during the book-building phase based on institutional investor demand and comparisons with tradable peers. An offering at the upper limit may signal strong interest in the company, but it can also indicate potential overvaluation and a desire to maximize fundraising at the expense of investor interests. An offering at the lower limit indicates weak demand or a conservative approach from underwriters, who prefer to ensure the success of the offering at a lower price.

Free-Float and Liquidity

Free float—the share of shares available for trading— is critical for liquidity in secondary trading and the ability for investors 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. A low free float (below 10%) poses risks of low liquidity and high volatility in stock prices, where even minor orders can move the market by several percentage points.

Lock-Up Period

The lock-up period—the time during which insiders and major shareholders are prohibited from selling shares—typically lasts from 90 to 180 days and aims to ensure price stability in the months following the offering. A short lock-up (less than 90 days) or the absence of one is a red flag, indicating that the main shareholders wish to exit the business quickly and secure profits. The end of a lock-up is often accompanied by a drop in stock prices of 10-30% due to an increase in the supply of shares on the market.

Primary Issuance vs. Share Sale

The offering structure can involve a primary issuance of new shares or the sale of existing shares by current shareholders, each with different implications. A primary issuance increases the company’s capital and directs funds toward development, but it dilutes existing shareholders’ stakes. When shareholders sell shares, the money goes to the sellers rather than the company, which may signal their desire to secure profits at the peak of valuation.

Lessons from Failures: What Went Wrong

The history of unsuccessful offerings provides valuable lessons for investors. The company CarMoney, which provides loans secured by vehicles, became the second example of a failed IPO in 2024 following initial excitement. The Chinese company Xiaomi conducted an offering on the Hong Kong Exchange on July 9, 2018, at a price of 17 Hong Kong dollars, but in the first hours of trading, the shares began to decline. The stock rose again for a couple of weeks but then fell to 8.28 Hong Kong dollars, only returning to its IPO price in July 2020. The reasons for the decline included overvaluation upon market entry as well as the trade dispute between the United States and China.

Saudi Aramco: Size Is No Guarantee

Saudis’ oil company, Saudi Aramco, conducted the largest and most controversial IPO, selling only 1.5% of its shares and raising $29.4 billion with a company valuation of $2 trillion. On the first day of sales, shares reached 35.2 riyals, with a maximum of 38.7 riyals; however, fluctuations began followed by periodic declines. This demonstrates that even the largest global companies are not immune to post-offering volatility.

Palantir: A Success Story

Successful IPOs also offer valuable benchmarks. American company Palantir, which specializes in big data analytics for the CIA, FBI, and major banks, conducted a successful offering due to clear positioning, unique technologies, and a well-understood business model. A key factor in its success was the presence of long-term contracts with government agencies and large businesses, ensuring predictable cash flows.

Practical Checklist: Systematizing the Approach