1. Revenue Growth
This is the starting point for any startup story. Found in the financial statements section of the Draft Red Herring Prospectus (DRHP), revenue growth shows how quickly the company is expanding its sales. Look for a consistent, high-growth trajectory
over the last three to five years. For a young company, a strong top-line growth rate is often more important than immediate profitability. However, be wary of growth that is slowing down significantly, as it may indicate market saturation or increased competition.
2. The Fresh Issue vs. Offer for Sale (OFS) Mix
This number reveals the IPO's true purpose. An IPO can be a 'Fresh Issue' of new shares, where the money raised goes to the company for growth, debt repayment, or expansion. Or it can be an 'Offer for Sale' (OFS), where existing shareholders like founders or early investors sell their shares and pocket the cash. Most IPOs are a mix. A high OFS component isn't automatically bad—venture funds need to exit—but it's crucial to ask why insiders are selling. If the money isn't funding the company's future, you're essentially just buying someone else's stake.
3. EBITDA and its Margin
Many startups are not profitable at the net level, which makes traditional metrics like the P/E ratio less useful. Instead, look at EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This figure gives a clearer picture of a company's core operational profitability by removing non-operating expenses. The EBITDA margin (EBITDA divided by revenue) shows how much cash the business generates from its primary operations. Is this margin improving over time? A positive or improving EBITDA margin can signal a clear path to future profitability, even if the company is currently loss-making.
4. Price-to-Sales (P/S) Ratio
For high-growth, low-profit tech companies, the Price-to-Sales ratio is a more relevant valuation metric than the Price-to-Earnings (P/E) ratio. It compares the company's total market value to its annual revenue. A lower P/S ratio can suggest a more attractive valuation. However, there is no single 'good' P/S ratio; it varies dramatically by industry. The key is to compare the company's P/S ratio to its listed peers, which you can find in the 'Basis for Issue Price' section of the prospectus. This comparison tells you if the IPO is priced reasonably relative to its competitors.
5. Debt-to-Equity Ratio
This ratio, found on the balance sheet, measures how much debt a company has compared to the amount of equity invested by its shareholders. It's a quick gauge of financial risk. A high debt-to-equity ratio means the company relies heavily on borrowed money, which can be risky, especially if its cash flows are not stable. While some debt is normal for expansion, a figure that is significantly higher than its industry peers should be a red flag, warranting a deeper look into the company's ability to service its debt.
6. LTV to CAC Ratio
While not always explicitly stated in the DRHP, the relationship between Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC) is vital for modern startups. LTV is the total revenue a company expects from a single customer over time, while CAC is the cost of acquiring that customer. A healthy LTV:CAC ratio is generally considered to be 3:1 or higher, meaning the customer generates at least three times the revenue as the cost to acquire them. This signals a sustainable and efficient growth model. While you may need to infer these figures, they are central to understanding if the company's growth is profitable in the long run.
7. Promoter and Key Shareholder Lock-in
Confidence from the inside is a powerful signal. Look at the post-IPO shareholding pattern and the lock-in period for promoters and major investors. SEBI regulations mandate certain lock-in periods, but understanding the extent of promoter holding post-listing is crucial. A significant promoter stake that remains locked in for an extended period indicates their long-term belief in the company's prospects. Conversely, if key insiders are retaining the minimum possible stake, it might suggest a lack of confidence in the future, which is an important consideration for any new investor.
