Is Green Mountain Coffee Roasters 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 Green Mountain Coffee Roasters' (GMCR.DL) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Green Mountain'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 be reported at a steady rate, we'll also look at how much Green Mountain's free cash flow has grown in comparison to 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 Green Mountain's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Green Mountain 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.

By the numbers
Now, let's take a look at Green Mountain's key statistics:

GMCR Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q3 2009.

GMCR Return on Equity data by YCharts.

Source: YCharts. *Period begins at end of Q3 2009.

How we got here and where we're going
Green Mountain gets off to a roaring start, but its equity-based metrics hold it back from a perfect score. Still, five out of seven possible passing grades is nothing to sneeze at. Depending on when you got in, you're very happy or very disappointed -- part of the peril of investing in a high-growth stock. Still, it's hard to deny that Green Mountain has posted incredible growth over the last three years. What can it do to get those equity metrics moving in the right direction for a perfect score next year?

Part of that will depend on Green Mountain's new CEO, Brian Kelley. The former Coca-Cola (KO 0.63%) executive brings ideal business experience. He headed up two integral supply chain divisions, and was set to take over Coke's massive North American business unit before Green Mountain gave him an offer he couldn't refuse. His predecessor made great strides by partnering with Starbucks (SBUX 0.65%) and other potential competitors, but Kelley's challenge now will be to push forward while fending off stronger challenges, not least from Starbucks and its new Verismo brewer, which is already available in a huge number of locations.

Green Mountain's latest earnings show a company that continues to make solid progress, as it trounced the consensus estimate for earnings per share. That's allowed it to continue a rebound that began not long after an analyst roundtable I participated in with my fellow Fools Travis Hoium and Sean Williams. Not to toot our horns too much, but a single-digit P/E for such a fast-growing company seemed a sure sign that the market had overreacted to some bad news. Investors have agreed, and Green Mountain's been by far our best performer since the start of our weekly series -- and its P/E has doubled since then, as well, regaining a healthy level befitting a fast-grower.

A small part of that growth may be tied into Green Mountain's diversification efforts. While its partnerships with both Starbucks and Dunkin' Brands (DNKN) are familiar to investors, Green Mountain's also attempting to brew up non-coffee flavors. Its lemonade K-Cup, first offered this August, prompted comparisons to SodaStream, although not necessarily in a positive way -- Green Mountain's lack of branded partnership could be a drawback in its diversification efforts. Many of Green Mountain's coffee K-Cups have brand support, including that of J.M. Smucker (SJM 2.35%), the owner of Folgers and other popular grocery-store coffees.

As long as Green Mountain can continue to make progress, there's no reason it can't improve on all its metrics and pull together a rare perfect score the next time we investigate its progress.

Putting the pieces together
Today, Green Mountain 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.