Is Silver Wheaton Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Silver Wheaton's (WPM -0.21%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Silver Wheaton's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Silver Wheaton's free cash flow has grown in comparison with its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Silver Wheaton's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Silver Wheaton managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Silver Wheaton's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Silver Wheaton's key statistics:

SLW Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q2 2009. 

SLW Return on Equity data by YCharts

Source: YCharts and Morningstar. *Period begins at end of Q2 2009. 

How we got here and where we're going
Silver Wheaton puts together a very impressive performance, racking up eight of nine possible passing grades. It's taken off from a virtual standstill in 2009 to post dramatic improvements on many of the metrics we like to see for long-term sustainable gains.

The company's only recently instituted a dividend, but it's already grown quite a bit in its short lifespan, and a sustainable free cash flow payout ratio means that there's still room for dividend growth. Since Silver Wheaton plans to pay dividends based on its operating cash flow, there's a good chance its payouts will increase as long as silver prices remain strong.

It's been more than a year since Foolish mining guru Christopher Barker called Silver Wheaton the most profitable company in the world, and it's only become a bigger moneymaker since then. Instead of mining silver itself, Silver Wheaton simply contracts to buy the silver miners dig up at fixed prices. That's brought great returns as the price of silver continues to dance around all-time highs set last year.

For example, the company's recent deal with Hudbay Minerals (HBM -0.07%) allows it to purchase each ounce of Hundbay's silver production, for the life of two mines, for just $5.90 per ounce. That's a significant discount from the silver-price-tracking iShares Silver ETF's (SLV -0.38%) most recent closing price just south of $33. Of course, if silver prices were to decline, the deal would look a lot less appealing for Silver Wheaton's shareholders, since the company had to pay $750 million to secure purchase rights. Silver Wheaton needed the Hundbay deal at least in part because its three-mine contract with Barrick Gold (GOLD -1.62%) will expire in 2013.

Barrick and Goldcorp (GG) together contribute a sizable chunk of Silver Wheaton's attributable reserves, which Christopher Barker's added up with its measured and indicated resources to get a figure of 1.25 billion ounces, which doesn't include the more recent Hundbay agreement. That's a substantial resource cushion to support all sorts of growth.

Putting the pieces together
Silver Wheaton has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.