IPO KPIs

When you open an IPO prospectus for the first time, it feels like someone handed you a mathematics textbook in a language you never studied.

EBITDA. PAT margin. ROCE. EPS. P/E ratio. RoNW.

Most first-time investors look at these terms, feel confused, and either skip them entirely or just apply based on GMP alone. Neither is ideal.

Here is the thing - you do not need a finance degree to read these numbers. Each KPI is answering one simple question about the company. Once you know what question each one answers, reading an IPO prospectus becomes a lot less intimidating.
This guide explains every major KPI, with examples, so you can make a more informed decision the next time you apply for an IPO.

What is a KPI?

KPI stands for Key Performance Indicator.

In the context of an IPO, KPIs are financial numbers that tell you how a company has been performing before it goes public. SEBI now requires every company filing for an IPO to disclose these numbers in the prospectus, specifically in a section called "Basis for Issue Price."

Think of KPIs as the company's report card. Just like a student's marks tell you how they performed in each subject, KPIs tell you how the company performed in areas like revenue growth, profitability, and efficiency.

No single KPI tells the full story. You need to look at several together and compare them against other companies in the same industry to get a real picture.

Revenue from Operations

The question it answers: Is this company actually selling things?

Revenue from operations is the total money a company earned from its core business activities selling products, providing services, or both. It does not include income from selling assets or one-time gains.

This is the starting point. Before anything else, you want to know: is this company generating real income from its business?

What to look for: Revenue should be growing year on year. A company whose revenue is flat or declining over 3 years needs a very compelling explanation for why the IPO is worth considering.

Example: If a pharma company made ₹200 crore in revenue in FY22, ₹260 crore in FY23, and ₹330 crore in FY24 then it is steady, consistent growth. A good sign.

EBITDA and EBITDA Margin

The question it answers: Is the core business profitable before taxes and debt costs?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It sounds complicated but it is actually a clean measure of how much profit the business makes from its operations alone before loan interest, before taxes, and before accounting adjustments.

EBITDA Margin is EBITDA expressed as a percentage of revenue.

EBITDA Margin = (EBITDA ÷ Revenue) × 100

Example: A company has revenue of ₹100 crore and EBITDA of ₹20 crore. EBITDA margin = 20%.

A higher EBITDA margin means the company keeps more money from every rupee it earns. A 20% EBITDA margin is generally considered healthy for manufacturing companies. For software companies, you would expect it to be higher 30% or above.

The key is to compare the EBITDA margin with competitors in the same industry. A 15% margin might be excellent in a low-margin sector like grocery retail but poor in a software company.

PAT and PAT Margin

The question it answers: What does the company actually take home after everything?

PAT stands for Profit After Tax. This is the final profit after paying all expenses, interest on loans, depreciation, and income tax. It is the bottom line number.

PAT Margin is PAT as a percentage of revenue.

PAT Margin = (PAT ÷ Revenue) × 100

EBITDA shows operating efficiency. PAT shows actual profitability. A company can have good EBITDA but poor PAT if it carries heavy debt (high interest costs) or pays a lot of tax.

Example: Revenue ₹100 crore, PAT ₹12 crore → PAT margin = 12%.

A company with consistently growing PAT over 3 years, alongside growing revenue, is a healthy sign. A company with growing revenue but shrinking PAT deserves closer scrutiny costs may be rising faster than sales.

One more thing: some new-age companies (like many tech startups that went public in 2021-22) had negative PAT meaning they were making losses. Zomato was loss-making when it went public. Investing in loss-making IPOs is not necessarily wrong but it requires a completely different lens of evaluation.

EPS - Earnings Per Share

The question it answers: How much profit does the company make per share?

EPS is the PAT divided by the total number of shares outstanding.

EPS = PAT ÷ Total Number of Shares

Example: A company made a PAT of ₹50 crore. Total shares = 10 crore. EPS = ₹5 per share.

IPO prospectuses show both pre-IPO EPS and post-IPO EPS. Post-IPO EPS is usually lower because the IPO creates new shares, spreading the same profit across more shares. This is called dilution.

Watch for the gap between pre and post-IPO EPS. A very large drop in EPS after the IPO means investors are paying more for less earnings per share.

P/E Ratio - Price to Earnings

The question it answers: Is the IPO price reasonable compared to what the company earns?

P/E ratio compares the issue price of the IPO share to the company's earnings per share.

P/E Ratio = Issue Price ÷ EPS

Example: Issue price ₹500, EPS ₹25 → P/E ratio = 20x.

This means you are paying ₹20 for every ₹1 of earnings. A P/E of 20x means the company would take 20 years to earn back your investment at current profit levels — assuming no growth.

A high P/E is not automatically bad. It means the market expects strong future growth. But a very high P/E compared to industry peers should make you think twice.

How to use it: Look at the P/E of established listed companies in the same sector. If the IPO company is asking for a P/E of 80x while its competitors trade at 30x, the IPO may be overpriced.

P/B Ratio — Price to Book Value

The question it answers: Am I paying more than what the company actually owns?

P/B ratio compares the issue price to the company's book value per share. Book value is what remains if you subtract all liabilities from all assets essentially the net worth of the company.

P/B Ratio = Issue Price ÷ Net Asset Value (NAV) per share

Example: Issue price ₹200, NAV per share ₹80 → P/B ratio = 2.5x.

You are paying ₹2.5 for every ₹1 of actual assets the company owns. A P/B below 1 means the stock is trading below its asset value rare in IPOs. Most IPOs price at a premium to book value.

A P/B of 1 to 3 is generally considered reasonable. Above 5 or 6 starts raising questions unless the company has exceptionally strong earnings and growth.

Asset-heavy businesses like manufacturing and banking are better evaluated using P/B. For asset-light businesses like software companies, P/B matters less because their main value is in people and intellectual property neither of which shows up on the balance sheet.

ROE - Return on Equity

The question it answers: How efficiently is the company using its shareholders' money?

ROE measures how much profit the company generates for every rupee of shareholders' equity (the money owners have put in).

ROE = (PAT ÷ Shareholders' Equity) × 100

Example: PAT ₹30 crore, Shareholders' Equity ₹150 crore → ROE = 20%.

A higher ROE means the company is efficient at converting equity into profit. An ROE of 15-20% is considered good for most industries. Banks typically have lower ROE targets. Technology companies often show higher ROE.

Consistently high ROE over 3 years is a positive signal. Inconsistent ROE - high one year, low the next needs explanation.

ROCE - Return on Capital Employed

The question it answers: How efficiently is the company using all its capital — both debt and equity?

ROCE goes one step further than ROE. It looks at the total capital the company uses shareholders' money plus borrowed money and measures how much operating profit it generates from that combined pool.

ROCE = (Operating Profit ÷ Capital Employed) × 100
Capital Employed = Total Assets − Current Liabilities

Example: Operating profit ₹40 crore, Capital Employed ₹200 crore → ROCE = 20%.

ROCE is particularly useful for capital-intensive companies those that need large factories, equipment, or infrastructure. A cement company, a steel manufacturer, or a logistics company would all be evaluated heavily on ROCE.

If ROCE is higher than the company's cost of borrowing, it means the company is creating value. If ROCE is lower than its interest rate on loans, the company is essentially destroying value by borrowing money it cannot deploy efficiently.

RoNW - Return on Net Worth

The question it answers: How much return is the company generating on its net worth?

RoNW is very similar to ROE and is often used interchangeably. Net worth = total assets minus total liabilities. It measures how much profit the company earned relative to its own net worth.

RoNW = (PAT ÷ Net Worth) × 100

SEBI mandates disclosure of RoNW in IPO prospectuses. When comparing two IPOs in the same sector, the one with consistently higher RoNW is generally the better managed business.

How to Use KPIs Together - A Simple Framework

Reading one KPI in isolation tells you very little. Here is a simple way to use them together before applying for any IPO:

Step 1: Check Revenue Growth

Is revenue growing steadily over 3 years? No growth = red flag.

Step 2: Check Profitability

Is EBITDA margin stable or improving? Is the company PAT positive?

Step 3: Check Valuation

Is the P/E reasonable compared to listed peers in the same industry? Is P/B justified?

Step 4: Check Efficiency

Is ROE or ROCE above 15%? Is it consistent across years?

Step 5: Compare with Peers

Every IPO prospectus includes a peer comparison table. Use it. A company asking for 50x P/E when peers trade at 25x needs to justify why it deserves a premium.

If the company passes most of these checks, the IPO is worth considering. If it fails on multiple counts, a high GMP alone is not enough reason to apply.