Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Six Flags (NYSE: SIX) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. Although past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that a company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Six Flags.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.6% Fail
  1-Year Revenue Growth > 12% 6.6% Fail
Margins Gross Margin > 35% 50.5% Pass
  Net Margin > 15% 64.7% Pass
Balance Sheet Debt to Equity < 50% 74.1% Fail
  Current Ratio > 1.3 1.30 Pass
Opportunities Return on Equity > 15% (45.4%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.3% Fail
  5-Year Dividend Growth > 10% NM NM
  Total Score   3 out of 8

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Six Flags had negative earnings over the period and just started paying a dividend in December 2010. Total score = number of passes.

With just 3 points, Six Flags has been a bit of a scary ride for investors lately. But the amusement-park operator is trying to come back onto the scene in a major way.

Six Flags just recently emerged from bankruptcy after filing in 2009. With a cleaner balance sheet, the company is hoping to put in better financial performance than in its checkered past, especially as the busy season approaches.

Yet the amusement-park industry has been tough for all players. Both Cedar Fair (NYSE: FUN) and Great Wolf Resorts (Nasdaq: WOLF) have massive debt loads to overcome and have had major negative returns on equity. Even having wiped out much of its debt in bankruptcy, Six Flags still has a debt-to-equity ratio that is more than we prefer to see.

We're also seeing some big strategic moves in the sector. Comcast (Nasdaq: CMCSA) will soon have to decide whether to buy out Blackstone's (NYSE: BX) stake in Universal Orlando or put the entire park up for bid.

With gas prices rising and the threat of "staycations" again rearing its head, regional theme parks such as Six Flags may become more appealing. For now, though, Six Flags has a lot of work to do before it's going to look anything like 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.

Add Six Flags to My Watchlist , which can find all of our Foolish analysis on it and all your other stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.