Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does IPG Photonics (NASDAQ:IPGP) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell IPG's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at IPG's key statistics:

IPGP Total Return Price Chart

Source: IPGP Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

202.6%

Pass

Improving profit margin

318.6%

Pass

Free cash flow growth > Net income growth

143.9% vs. 2,580%

Fail

Improving EPS

2,240%

Pass

Stock growth (+ 15%) < EPS growth

276.7% vs. 2,240%

Pass

Source: YCharts. * Period begins at end of Q4 2009.

IPGP Return on Equity Chart

Source: IPGP Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

918.6%

Pass

Declining debt to equity

(74.2%)

Pass

Source: YCharts. * Period begins at end of Q4 2009.

How we got here and where we're going
Six out of seven passing grades is a pretty strong result for IPG, but you might not have known the company was in such a good position last year. Shares are up more than 30% in the past year, but 2012 was quite up and down, with a big early rise, a midyear swoon, and a fall spike that added up to only a small amount of IPG's near-three-bagger three-year return. The divergence between share price and earnings per share has brought IPG into rather inexpensive territory -- its price-to-free cash flow ratio, despite the smaller change in that number over time, is only 30 right now, and its P/E is at 22. Does this imply more gains in the future, on the back of continued growth? Let's dig a little deeper.

Earlier this year, my fellow Fool Brian Stoffel pointed out that IPG's difficulty in maintaining its gains was a bit nonsensical in light of strong growth and, more particularly, in light of outsized profitability relative to its competitors. Fellow laser makers Rofin-Sinar (NASDAQ:RSTI) and Coherent (NASDAQ:COHR) continue to have net margins in the mid-single-digit range, and more recent fiber optic laser entrant JDS Uniphase (NASDAQ:VIAV) is barely profitable at all. It's easy to talk about this important distinction, but it's better to simply show you what's going on:

IPGP Profit Margin Quarterly Chart

Source: IPGP Profit Margin Quarterly data by YCharts.

None of these competitors has managed to grow and sustain margins at IPG's level over the tracked period. Nor is IPG sitting still with its segment-leading market share. Just last month, the company bought out small privately held Mobius Photonics to move deeper into UV lasers. Fool contributor Tim Beyers also speculates that recent military trials of solid-state laser weapons could be an opportunity for IPG to extend its technological reach while keeping U.S. servicemen safe.

Putting the pieces together
Today, IPG 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.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends and owns shares of IPG Photonics and Rofin-Sinar Technologies. 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.