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, and then decide if Mindray Medical (NYSE:MR) 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 the 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 Mindray Medical.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

25.5%

Pass

 

One-Year revenue growth > 12%

21.8%

Pass

Margins

Gross margin > 35%

55.7%

Pass

 

Net margin > 15%

17%

Pass

Balance sheet

Debt to equity < 50%

11.2%

Pass

 

Current ratio > 1.3

3.44

Pass

Opportunities

Return on equity > 15%

14.6%

Fail

Valuation

Normalized P/E < 20

32

Fail

Dividends

Current yield > 2%

1.2%

Fail

 

Five-year dividend growth > 10%

21.7%

Pass

       
 

Total Score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Mindray Medical last year, the company has lost a point, with a drop in return on equity leading to the decline. But the stock has done reasonably well, gaining 20% over the past year.

Mindray is a Chinese manufacturer of basic medical equipment, including patient monitoring and diagnostic devices, as well as ultrasound and other imaging systems. Given the strength in the Chinese economy over the past decade, Mindray has had a healthy market to tap.

But Mindray isn't free of competition. U.S. medical-device makers General Electric (NYSE:GE), Abbott Labs (NYSE:ABT), and Johnson & Johnson (NYSE:JNJ) are just a few of the companies looking to Chinese operations for growth opportunities. If anything, competition will only get fiercer as more companies realize the potential of the Chinese market.

Mindray has had mixed results on the earnings front over the past year. In May, the company had strong revenue growth but missed on profit estimates. Then, in August, Mindray boosted its guidance, sending shares soaring. Yet just yesterday, Mindray fell short on both the top and bottom lines, leaving investors wondering what the next step may be.

For Mindray to improve, it needs to get its earnings power to catch up with its somewhat expensive stock price. Until that happens, it'll be hard for Mindray to make much more progress toward becoming a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection 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 Mindray Medical to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric and Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson and Mindray Medical. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.