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 Kodiak Oil & Gas (NYSE:KOG) 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 Kodiak'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 Kodiak's key statistics:

KOG Total Return Price Chart

KOG Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

2,480%

Pass

Improving profit margin

155.1%

Pass

Free cash flow growth > Net income growth

(538.9%) vs. 1,522.6%

Fail

Improving EPS

1,050%

Pass

Stock growth (+ 15%) < EPS growth

112.4% vs. 1,050%

Pass

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

KOG Return on Equity (TTM) Chart

KOG Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

320.9%

Pass

Declining debt to equity

1,250%

Fail

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

How we got here and where we're going
Kodiak Oil & Gas has all the hallmarks of a fast-growing oil producer -- revenue and earnings have soared, but so have debts, and free cash flow is in freefall as the company aggressively drills new wells. In fact, this is the same score Kodiak earned last year -- a solid five out of seven passing grades -- with the same two failing grades for the same reasons. Kodiak may be stuck at this score for a while unless it can engineer some real financial wizardry to push debt down and cash flow up without curtailing growth. Nonetheless, let's take a look at what Kodiak's got in store for its future, to see if a perfect score might be possible in time.

Kodiak's most recent quarter was a disappointment, with production down on a sequential basis due to rough winter weather. Investors have been largely unfazed by that short-term headwind, as shares are up roughly 30% in 2014, but Fool energy specialist Matt DiLallo believes that the shortfall may be a sign that Kodiak's acreage holds less promise than those of other Bakken producers. Kodiak's fellow North Dakota drillers Whiting Petroleum (NYSE:WLL) and Hess (NYSE:HES) both shrugged off wicked weather and met their production goals during the first quarter.

Not all of Kodiak's wells look weak, though, as Fool energy specialist Tyler Crowe notes several outperforming wells recently drilled in Dunn County, N.D. Efforts to reduce the spacing between wells is also yielding encouraging results for Kodiak. The problem with all of this drilling, of course, is that it's been incredibly expensive -- Kodiak has burned through $3.7 billion in capital expenditures  over the past three fiscal years despite generating just $1.4 billion in revenue for the same time frame. The company seems to be turning a corner in this regard, though, as capex was lower than revenue during the first quarter. Investors will need to consider the possibility that declining capex may have more to do with the fact that Kodiak had simply been spending too much time and energy trying to do something with poor-quality acreage. Bakken wells are typically subject to rapid production decline rates, and Kodiak's exclusive focus on this region could leave its hoped-for potential always just out of reach.

Putting the pieces together
Today, Kodiak 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.

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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.