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 Globe Specialty Metals (NASDAQ:GSM) 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 Globe Specialty Metals' 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 Globe Specialty Metals' key statistics:

GSM Total Return Price Chart

GSM Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

19%

Fail

Improving profit margin

(65.7%)

Fail

Free cash flow growth > Net income growth

113% vs. (59.1%)

Pass

Improving EPS

(57.8%)

Fail

Stock growth (+ 15%) < EPS growth

(0.1%) vs. (57.8%)

Fail

Source: YCharts. *Period begins at end of Q1 2011.

GSM Return on Equity (TTM) Chart

GSM Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(60.8%)

Fail

Declining debt to equity

184.4%

Fail

Dividend growth > 25%

(62.5%)

Fail

Free cash flow payout ratio < 50%

54.3%

Fail

Source: YCharts. *Period begins at end of Q1 2011.

How we got here and where we're going
Globe Specialty Metals fell on its face right out of the starting gate, and it has limped to the finish line of our assessment with a pitiful one out of nine possible passing grades. Surprisingly, Globe's strong free cash flow growth has not been enough to push its free cash flow dividend payout ratio to a more reasonable level -- the company has held this ratio near 30% several times in the past three years, but it seems to prefer paying out more than half of its free cash flow on a regular basis. This generally underwhelming performance has left investors with flat returns. Can Globe improve its mediocre fundamentals and regain investors' trust? Let's dig deeper to find out.

Globe made progress last month with its fiscal third-quarter earnings report, which announced an 11% year-over-year growth in shipment volume to roughly 74,000 tons despite the ever-present bogeyman of bad weather. It also revealed that its furnaces in Becancour, Canada, resumed operation and should be able to increase the company's production by up to 54,000 tons per year. The company also plans to seek out acquisitions, although its war chest is a fair bit smaller than it was even a year ago -- for the first time in its history of public financial reporting, Globe's long-term debt now exceeds its available cash.

However, with its customer base in Canada demanding volumes "not seen in many years," according to CEO Jeff Bradley, Globe now anticipates servicing anywhere between 25,000 tons and 30,000 additional tons of unmet demand. The Betancour shutdown goes a long way toward explaining the discrepancy between free cash flow and earnings, and its restart should help propel Globe's top and bottom lines higher, perhaps high enough to win it a few more passing grades the next time we assess it. Underlying all of this was a concerted push by Chinese suppliers to dump cheap silicon on Canadian markets, but protective tariffs imposed late last year have helped fend off this threat for the time being.

Globe's recent history has been marred by anticompetitive efforts from overzealous Chinese silicon suppliers, which has depressed key metrics and made the company look in worse shape than it may actually be. However, it's important for potential investors to remember that Globe's share price, which has doubled over the past year, has been driven almost exclusively by valuation expansion -- its P/E ratio is nearly in triple digits today, and its price-to-free-cash-flow ratio, while currently a more modest 42, has nearly tripled in the past year, far outpacing the surge in Globe's share price.

Putting the pieces together
Today, Globe Specialty Metals 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.

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.