Unlisted shares can give investors an opportunity to participate in a company before it potentially goes public or enters a new phase of growth. However, investing in a privately held company requires careful analysis because these securities generally have lower liquidity and less transparent market pricing than listed stocks.
Unlike listed companies, where investors can observe a continuously changing market price, an unlisted company’s valuation may depend on private transactions, financial statements, funding rounds, comparable companies and other valuation methods.
This makes fundamental analysis particularly important.
One of the simplest ways to assess a company’s financial health is by examining key financial ratios. Rather than relying on a single number, investors should evaluate a combination of growth, profitability, efficiency, leverage, liquidity and valuation metrics.
Here are seven important financial ratios and measures to examine before buying an unlisted share.
1. Revenue Growth
Revenue growth is one of the first indicators investors should examine when evaluating a company.
Formula
Revenue Growth = (Current Year Revenue − Previous Year Revenue) ÷ Previous Year Revenue × 100
Revenue growth shows whether the company’s sales are expanding over time.
For example, if a company generated ₹100 crore in revenue one year and ₹120 crore the following year:
Revenue Growth = (₹120 crore − ₹100 crore) ÷ ₹100 crore × 100 = 20%
A growing business can be attractive, but the quality and sustainability of that growth matter.
Investors should ideally examine a 3–5 year revenue trend instead of focusing on just one financial year.
What to Look For
Consider:
- Consistent year-on-year growth
- Growth compared with industry peers
- Organic versus acquisition-driven growth
- Customer concentration
- Revenue visibility
- Whether growth is translating into higher profits
Rapid revenue growth without corresponding improvements in profitability or cash flow may require closer investigation.
2. Net Profit Margin
Revenue tells you how much a company sells, but profit margin helps explain how much of that revenue ultimately becomes profit.
Formula
Net Profit Margin = Net Profit ÷ Revenue × 100
Suppose a company earns ₹20 crore in net profit from ₹100 crore of revenue.
Its net profit margin would be:
20 ÷ 100 × 100 = 20%
A stable or improving margin can indicate effective cost management and stronger profitability.
However, margins vary considerably between industries. A technology business, manufacturer and retailer may have very different normal profit margins.
Why Net Profit Margin Matters
Investors should look for:
- Stable margins over several years
- Improving profitability
- Margin performance versus competitors
- Impact of raw-material costs
- Employee and operating expenses
- Interest and tax expenses
A company with strong sales growth but continuously declining margins may face rising costs or increasing competitive pressure.
3. ROE: Return on Equity
Return on Equity, or ROE, measures how effectively a company generates profit using shareholders’ equity.
Formula
ROE = Net Profit ÷ Shareholders’ Equity × 100
For example, if a company earns ₹15 crore in net profit while shareholders’ equity is ₹100 crore:
ROE = 15%
A higher ROE can indicate efficient use of shareholder capital. However, investors should avoid treating a high ROE as automatically positive.
Debt can influence ROE significantly. A highly leveraged company may report a strong ROE because it is operating with relatively less equity.
How to Analyse ROE
Instead of asking whether ROE is simply “high” or “low,” compare it with:
- The company’s own historical ROE
- Industry averages
- Comparable businesses
- Debt levels
- Profit growth
A consistently healthy ROE combined with manageable debt and sustainable earnings can provide a more meaningful picture of business efficiency.
4. ROCE: Return on Capital Employed
Return on Capital Employed, or ROCE, measures how efficiently a company generates operating returns from the capital employed in the business.
Formula
ROCE = EBIT ÷ Capital Employed × 100
EBIT refers to Earnings Before Interest and Tax.
ROCE can be particularly useful when analysing capital-intensive businesses such as manufacturing, infrastructure, engineering and industrial companies.
For example, if a business generates ₹25 crore in EBIT from ₹200 crore of capital employed:
ROCE = 12.5%
Why ROCE Is Important
ROCE can help investors determine whether a company is generating attractive operating returns from the resources invested in the business.
Look for:
- Consistent ROCE
- Improvement over time
- ROCE compared with competitors
- ROCE relative to the company’s cost of capital
- Efficient use of fixed and working capital
A company that consistently earns strong returns on its invested capital may have better economics than a business that requires large amounts of capital to generate modest profits.
5. Debt-to-Equity Ratio
Debt can help a company finance expansion, but excessive borrowing can increase financial risk.
The Debt-to-Equity ratio compares a company’s debt with shareholders’ equity.
Formula
Debt-to-Equity Ratio = Total Debt ÷ Shareholders’ Equity
For example, if a company has ₹80 crore of debt and ₹100 crore of shareholders’ equity:
Debt-to-Equity = 0.8
A higher ratio generally indicates greater financial leverage.
However, there is no universal debt-to-equity level that is appropriate for every company. Capital-intensive industries may naturally operate with more debt than asset-light businesses.
What Investors Should Check
Do not examine debt-to-equity in isolation. Also consider:
- Interest coverage
- Debt repayment schedule
- Cash flow from operations
- Interest costs
- Short-term versus long-term debt
- Planned capital expenditure
A company with moderate debt but weak cash flows may face more financial pressure than the ratio alone suggests.
6. Current Ratio
The Current Ratio measures a company’s ability to meet its short-term liabilities using its current assets.
Formula
Current Ratio = Current Assets ÷ Current Liabilities
For example, if a company has ₹150 crore of current assets and ₹100 crore of current liabilities:
Current Ratio = 1.5
A stronger liquidity position can provide greater financial flexibility, especially when a company faces unexpected expenses or temporary pressure on cash flows.
What Does the Current Ratio Tell You?
Investors can use it to examine:
- Short-term financial strength
- Working-capital management
- Ability to meet upcoming obligations
- Dependence on external financing
However, an extremely high current ratio is not automatically a positive sign. It may indicate that cash, inventory or receivables are not being deployed efficiently.
The quality of current assets also matters. ₹100 crore in cash is not equivalent to ₹100 crore in slow-moving inventory.
7. P/E and Other Valuation Multiples
A strong company can still be a poor investment if the purchase price is too high.
For listed companies, investors often use market prices to calculate valuation multiples. For an unlisted business, valuation can be more complicated because there is no continuously quoted market price.
One commonly used metric is the Price-to-Earnings ratio.
Formula
P/E Ratio = Price per Share ÷ Earnings per Share
For an unlisted company, investors should not simply compare the proposed purchase price with its earnings. The valuation should also be examined against:
- Comparable listed companies
- Industry valuation multiples
- Revenue growth
- Profitability
- Cash flows
- Return ratios
- Debt levels
- Future growth prospects
- Liquidity considerations
Other valuation measures, such as Price-to-Book (P/B), EV/EBITDA and enterprise-value-based approaches, may also be relevant depending on the company’s industry and financial structure.
Why Valuation Matters
Suppose two businesses have similar financial performance, but one is available at a significantly higher valuation.
The more expensive company may need substantially faster growth to justify the premium.
Therefore, investors should evaluate not only “Is this a good company?” but also “Am I paying a reasonable price for this company?”
The 7 Metrics at a Glance
| Metric | What It Measures | Why It Matters |
|---|---|---|
| Revenue Growth | Sales expansion | Indicates business growth |
| Net Profit Margin | Profitability | Shows how efficiently revenue becomes profit |
| ROE | Return on shareholders’ equity | Measures equity efficiency |
| ROCE | Return on capital employed | Evaluates operating capital efficiency |
| Debt-to-Equity | Financial leverage | Helps assess debt-related risk |
| Current Ratio | Short-term liquidity | Indicates ability to meet current obligations |
| P/E & Valuation Multiples | Purchase valuation | Helps determine whether the entry price is reasonable |
Don’t Analyse One Ratio in Isolation
One of the biggest mistakes investors can make is treating a single ratio as a buy or sell signal.
Financial ratios become much more useful when they are analysed together.
Consider a company with:
- High revenue growth
- Strong ROE
- Rising debt
- Declining margins
- Weak operating cash flow
At first glance, the growth and ROE may look attractive. But increasing leverage and weakening profitability could indicate potential financial risks.
Similarly, a company with moderate growth but strong margins, low debt, healthy cash generation and consistent ROCE may have a more stable financial profile.
The goal is therefore to understand the relationship between different financial metrics, rather than chasing the highest number.
Compare 3–5 Years of Financial Data
A single year’s financial statement can sometimes provide a misleading picture.
A company may experience an unusually strong year because of:
- Temporary commodity-price movements
- One-time income
- Exceptional demand
- Asset sales
- Tax benefits
- Accounting adjustments
- Large contracts
This is why analysing several years of financial data is generally more useful.
Look for trends in:
- Revenue
- EBITDA
- Net profit
- Margins
- ROE
- ROCE
- Debt
- Cash flow
- Working capital
A consistent trend can provide more insight than an isolated annual result.
Compare the Company With Industry Peers
Financial ratios become more meaningful when compared with similar businesses.
For example, a 15% net profit margin may be excellent for one industry but below average for another.
Similarly, a debt-to-equity ratio that appears high for a technology company may be normal for an infrastructure or manufacturing business.
When analysing an unlisted company, investors can compare its financial metrics with similar listed companies operating in the same industry.
The comparison can help identify whether the private company’s:
- Growth rate is competitive
- Margins are attractive
- Returns on capital are strong
- Debt levels are reasonable
- Valuation is justified
Additional Checks Before Buying an Unlisted Share
Financial ratios are important, but they are only one part of the due-diligence process.
Investors should also investigate the company’s broader business fundamentals.
Business Model
Understand how the company makes money, who its customers are and whether its revenue sources are sustainable.
Promoters and Management
Examine the track record, experience and credibility of the management team and promoters.
Corporate Governance
Review related-party transactions, auditor observations, disclosures and the overall quality of corporate governance.
Cash Flow
Profit does not always equal cash generation. Compare reported earnings with operating cash flow to determine whether profits are translating into actual cash.
Shareholder Structure
Understand who owns the company, whether there are major institutional investors and what the terms of the proposed transaction are.
Liquidity Risk
Unlisted securities generally do not have the same liquidity as listed stocks. Selling may take time and may require finding a suitable buyer.
Exit Opportunity
Before investing, consider how you might eventually exit the investment. A potential IPO should not be treated as a guaranteed exit route.
A Simple Framework for Analysing an Unlisted Company
Investors can follow a structured sequence when evaluating a private company’s financial health:
Revenue Growth → Profit Margin → ROE → ROCE → Debt → Liquidity → Valuation
Start by asking whether the business is growing.
Then determine whether that growth is profitable.
Next, examine how efficiently the company uses shareholder and operating capital.
After that, assess debt and short-term liquidity.
Finally, determine whether the proposed purchase price is reasonable relative to the company’s fundamentals and comparable businesses.
This approach helps prevent investors from becoming overly focused on a single attractive metric.
Frequently Asked Questions
What is the most important ratio for an unlisted company?
There is no single most important ratio. Revenue growth, profitability, ROE, ROCE, leverage, liquidity and valuation should be evaluated together.
How many years of financial data should I analyse?
A 3–5 year history can provide a more useful view of the company’s growth, profitability and financial stability than a single year’s results.
Is a high ROE always a good sign?
Not necessarily. High debt can artificially increase ROE by reducing the amount of equity relative to the company’s earnings. ROE should therefore be analysed alongside leverage and cash flow.
What valuation methods can be used for unlisted companies?
Depending on the business, investors may consider P/E, P/B, EV/EBITDA, discounted cash flow and comparable-company analysis. Liquidity and the specific characteristics of the private security may also require valuation adjustments.
Are unlisted shares riskier than listed shares?
They can involve additional risks, particularly lower liquidity and less transparent price discovery. Investors may also have fewer opportunities to exit quickly compared with listed securities.
Final Takeaway
Unlisted shares can provide access to businesses before a potential listing or during periods of private-company growth, but the opportunity comes with additional risks and requires careful due diligence.
The seven key metrics discussed in this article provide a useful starting point:
Revenue Growth → Net Profit Margin → ROE → ROCE → Debt-to-Equity → Current Ratio → Valuation
However, these numbers should never be treated as standalone investment signals.
The strongest analysis combines multi-year financial trends, industry comparisons, cash-flow analysis, management quality, corporate governance, capital structure and valuation.
Most importantly, a good business does not automatically make a good investment. The price paid for the investment matters just as much as the quality of the underlying company.
Before purchasing an unlisted security, investors should independently verify the company’s financial statements, valuation, ownership structure, transaction terms and potential exit options. Where appropriate, professional financial and legal advice should also be considered.
Disclaimer: This article is for educational and informational purposes only and should not be considered investment advice or a recommendation to buy or sell any security. Unlisted investments can involve significant liquidity, valuation and financial risks. Investors should conduct independent due diligence before making any investment decision.