Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Capstone Turbine (Nasdaq: CPST) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Capstone.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 28% pass
  1-Year Revenue Growth > 12% 28% pass
Margins Gross Margin > 35% (4.5%) fail
  Net Margin > 15% (32.2%) fail
Balance Sheet Debt to Equity < 50% 15.5% pass
  Current Ratio > 1.3 1.82 pass
Opportunities Return on Equity > 15% (62.9%) fail
Valuation Normalized P/E < 20 256.03 fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Capstone weighs in with a score of 4. That's not perfect, and Capstone shareholders have been waiting a long time for the company's potential to translate into higher stock prices.

Capstone makes low-emission microturbines, which have long been seen as a potential game-changer in alternative energy. At various times in its history, its working relationship with United Technologies (NYSE: UTX) and an experiment with its products at Wal-Mart (NYSE: WMT) store locations seemed to hold promise for Capstone's eventual success.

But the company has had financial issues for years. Bad margins and high cash-burn rates have plagued Capstone throughout its history. Most importantly, the company has never turned a profit.

Recently, the stock popped off its lows on news that General Electric (NYSE: GE) had acquired some assets and intellectual property related to waste-heat recovery from Calnetix, but the only change for Capstone is that GE will be their new supplier. Even with a big rise in recent months, the stock still trades under $1.

Capstone has never recovered from the huge shellacking its stock took during the tech bust. Despite its interesting technology, the company needs to achieve something significant to start generating revenue, cash flow, and net profit before it has any chance of becoming a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Wal-Mart, which is a Motley Fool Inside Value pick and a Motley Fool Global Gains recommendation. 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 Fool has a disclosure policy.