I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up in our series is China Green Agriculture (NYSE: CGA), whose fertilizer products are helping the Sino Superpower develop an environmentally friendly farming infrastructure. Few things could be more important for a country with 1 billion people to feed.

Foolish facts

Metric

China Green Agriculture

CAPS stars (5 max)

*****

Total ratings

1,029

Percent bulls

97.4%

Percent bears

2.6%

Bullish pitches

121 out of 127

Highest-rated peers

Yara International, CVR Energy (NYSE: CVI), ShengdaTech (Nasdaq: SDTH)

Data as of Aug. 30.

Fools like that story to this day, even after the stock has been a four-bagger for our Motley Fool Global Gains service. They see a sustainable growth story.

"This company is about China's internal economy, driven by population pressures, entrepreneurial small farming in rural areas, a hard limit in domestic arable land (and water), and a increasing commercial demand tied to the rising standard of living in population centers, where people increasingly have money in their pockets," wrote CAPS All-Star marc64 recently.

Wall Street agrees. Analysts predict the company will improve earnings by 27% a year for the foreseeable future. Regardless, China Green entered today trading for just seven times next year's estimate of $1.43 in earnings per share. That's just too cheap.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

66.3%

87.1%

24.4%

Revenue growth

45.2%

55.8%

48.9%

Gross margin

60.9%

58.2%

56.7%

Receivables growth

93.9%

127.5%

90.4%

Shares outstanding

24.56 million

18.59 million

18.38 million

Source: Capital IQ, a division of Standard & Poor's.

Most of what's here is good, but there are a couple of areas of concern. Let's review:

  • While revenue growth has been steady, net income growth has varied widely. This isn't so much a bad sign as something to watch. Emerging economy upstarts tend to produce more volatile results.
  • Knowing that makes China Green's track record of expanding gross margins all the more impressive.
  • If there were to be a concern here, it would be with the rising share count. After two years of holding the line on dilution, shares outstanding are up 32% over the past year. What gives? In July, the company completed a $200 million shelf registration that will add heft to its balance sheet.

Competitor checkup

Competitor

Normalized Net Income Growth (3 years)

China Agritech (Nasdaq: CAGC)

24.8%

China Green Agriculture

N/A

Sino Green Land

N/A

Source: Capital IQ. Data as of Aug. 30.

Interestingly, China Green Agriculture doesn't have the history that China Agritech has. But what the upstart lacks in history it makes up for in growth.

Look at the second table again. When high growth is coupled with increasing gross margins, it usually leads to big earnings gains (check), generous free cash flow (check again), and rising returns on capital (almost; ROC rose in fiscal 2009 but is down over the past 12 months).

Grade = sustainable
China Green isn't the sort of techie we look for at Rule Breakers, but as marc64 points out, it's clearly helping to solve a problem that has value to farmers and the Chinese government. I like that position enough to bet on the stock in my CAPS portfolio.

Now it's your turn to weigh in. Do you like China Green Agriculture at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email or replying to him on Twitter.