Is Eldorado Gold the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Eldorado Gold (NYSE: EGO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Eldorado Gold.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 88.2% Pass
  1-Year Revenue Growth > 12% 42.1% Pass
Margins Gross Margin > 35% 65.4% Pass
  Net Margin > 15% 26.0% Pass
Balance Sheet Debt to Equity < 50% 4.2% Pass
  Current Ratio > 1.3 2.36 Pass
Opportunities Return on Equity > 15% 8.5% Fail
Valuation Normalized P/E < 20 55.62 Fail
Dividends Current Yield > 2% 0.6% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   6 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Eldorado paid its first dividend in Aug. 2011. Total score = number of passes.

With a score of six, Eldorado Gold has dug up some good prospects for investors. The miner has obviously benefited from the popularity of gold lately, but it also has some ambitious targets for the future.

Plenty of gold miners have used the huge run-up in the price of gold to boost their growth prospects. Although well-known companies like Newmont Mining (NYSE: NEM  ) and Barrick Gold (NYSE: ABX  ) are mostly too large to grow effectively, smaller miners like Yamana Gold (NYSE: AUY  ) and Agnico-Eagle Mines (NYSE: AEM  ) have much better potential to see fast growth.

But among growth players, it's hard to beat Eldorado. In the past two years, the company has seen its gold reserves rise by almost 50% to 18.7 million ounces. But Eldorado plans to grow even faster in the next several years, aiming to more than double its production from 2010 levels through 2015.

At the same time, though, Eldorado isn't content to pursue growth. It has also joined silver-streamer Silver Wheaton (NYSE: SLW  ) by rewarding shareholders through dividends. Specifically, Eldorado plans to raise its dividend yield to the 2% level over the next several quarters. With a cash cost of production below $400 per ounce, the company appears to have the cash flow to support those payouts.

As you'd expect with a growth company, Eldorado's earnings multiple is too high for the stock to reach perfection. But as dividends rise and if gold stays high, then Eldorado could look a lot shinier in the coming years.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add Eldorado Gold to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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