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, then decide if Entropic Communications (Nasdaq: ENTR) 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. 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 mean nothing if a company can't produce profits from them. Strong margins ensure that 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.
  • Money-making 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 Entropic Communications.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 124.1% Pass
  1-Year Revenue Growth > 12% 88.5% Pass
Margins Gross Margin > 35% 54.0% Pass
  Net Margin > 15% 30.6% Pass
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 11.16 Pass
Opportunities Return on Equity > 15% 44.3% Pass
Valuation Normalized P/E < 20 25.01 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   7 out of 10

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

Entropic Communications gets a respectable score of 7. The company is in a hot area right now, but a lot depends on how well it can execute going forward.

Entropic is a semiconductor company, but it specializes in a very narrow niche: making ways to connect various types of home entertainment. Given the increasing need to connect cable TV, Internet, and mobile device media in a single platform, it's not surprising that Entropic was one of the 10 best tech stocks of 2010. And whereas MIPS Technologies (Nasdaq: MIPS), another company in the space, focuses on building its processor architecture into each individual entertainment device, Entropic uses coaxial cable networking to bridge the gaps among these devices.

With demand for mobile devices on the rise, connecting them has become increasingly important. Best Buy (NYSE: BBY) has recently seen weak sales overall, but it has seen huge volume growth in appliances that help bring mobile broadband to a variety of devices. With cable companies Time Warner Cable (NYSE: TWC) and Comcast (Nasdaq: CMCSA) as well as mobile giants Verizon (NYSE: VZ) and Motorola Solutions (NYSE: MSI) relying on Entropic's technology, growth doesn't seem to be a concern anytime soon.

What is a concern, though, is Entropic's soaring stock price. But as long as the company can keep pace with the explosion in new entertainment devices, ranging from tablets like the iPad to ever more complicated smartphones, valuations are likely to be the last thing on shareholders' minds. That doesn't make Entropic perfect, but it's worth looking at more closely.

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.

Click here to add Entropic Communications to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Best Buy, which is a Motley Fool Inside Value and Motley Fool Stock Advisor selection. 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.