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 Forest Laboratories (NYSE:FRX) 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 Forest'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 Forest's key statistics:

FRX Total Return Price Chart

FRX Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

(25.4%)

Fail

Improving profit margin

(106.3%)

Fail

Free cash flow growth > Net income growth

(110.5%) vs. (104.7%)

Fail

Improving EPS

(105.4%)

Fail

Stock growth (+ 15%) < EPS growth

34.1% vs. (105.4%)

Fail

Source: YCharts. *Period begins at end of Q1 2010.

FRX Return on Equity Chart

FRX Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(86.4%)

Fail

Declining debt to equity

No debt

Pass

Source: YCharts. *Period begins at end of Q1 2010.

How we got here and where we're going
Things don't look good for Forest, as it earns only one out of seven possible passing grades, and even that lone pass was granted simply because the company has no debt -- a situation that may not hold up if bottom-line declines continue. However, Forest's share price has been on an upswing despite the collapse of all our tracked financial metrics over the past three years. Will declining revenues and free cash flows continue to be ignored by the investing public, or will Forest's fundamental weaknesses catch up to it in the end?

Like many big pharma companies, Forest suffered a big drop in revenue when a blockbuster drug's patent expired. In Forest's case, it was anti-depressant Lexapro, but the company has been moving forward on new drugs to replace it. Over the past several quarters, Forest has been unable to fend off stiff generic competition from Teva Pharmaceutical (NYSE:TEVA), which has understandably pushed down prices on Lexapro quite a bit.

Forest's hope is that new drugs will replace lost Lexapro sales. In August, Forest and partner Ironwood Pharmaceuticals (NASDAQ:IRWD) got FDA approval for a treatment for irritable bowel syndrome, which hits the market in December. Last month, Forest also announced that Namenda XR, a once-daily treatment for moderate to severe Alzheimer's, has been made available throughout the United States. The company also announced positive results from a phase 3 clinical trial of the fixed dose combination of nebivolol and valsartan for hypertension. Forest also has two FDA-approved cardiovascular drugs (Bystolic and Tiazac) to treat high blood pressure, which might help turn around flagging revenue in the next few quarters.

Forest's shares recently tacked on more gains after announcing a succession plans for current CEO Howard Solomon, who plans to retire by the end of the year. Expectations for Forest are quite low, having gotten pushed down substantially over the past few months. With the Lexapro loss last year and Namenda's impending patent expiration in 2015 -- both drugs used to account for about two-thirds of total revenue -- investors certainly have plenty of reason to be skeptical and concerned about Forest's future.

Putting the pieces together
Today, Forest has few 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 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.