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 Mattel (Nasdaq: MAT) 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 Mattel.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2.7% Fail
  1-Year Revenue Growth > 12% 7.3% Fail
Margins Gross Margin > 35% 50.5% Pass
  Net Margin > 15% 11.4% Fail
Balance Sheet Debt to Equity < 50% 47.7% Pass
  Current Ratio > 1.3 2.65 Pass
Opportunities Return on Equity > 15% 26.5% Pass
Valuation Normalized P/E < 20 18.12 Pass
Dividends Current Yield > 2% 3.4% Pass
  5-Year Dividend Growth > 10% 16.2% Pass
       
  Total Score   7 out of 10

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

Mattel plays a good game with its score of 7 points. But its weakness has been slowing growth, and it's unclear where the company will find more revenue going forward.

As a major toymaker, Mattel is known for its trademark Barbie dolls. Yet increasingly, the company relies on licensing deals for other companies' characters. For instance, last year, Mattel got a big boost from sales of Disney (NYSE: DIS)-inspired Toy Story action figures, as well as from World Wrestling Entertainment (NYSE: WWE) characters. But its own Fisher-Price division saw sales drop, and it was hurt even more by a voluntary recall.

Where Mattel is falling behind is in developing new revenue streams. Rival Hasbro (Nasdaq: HAS) has its own stable of older products, but it has also moved forward with a movie studio and a TV-production company. That could help Hasbro develop its own stable of high-margin revenue-producing content and leave Mattel in the dust.

Still, Mattel is trying. Earlier this year, it announced a licensing agreement with THQ (Nasdaq: THQI) to develop interactive games based on Mattel characters. If the deal helps bridge the generation gap, then Mattel could find itself with millions of potential new customers. If not, though, Mattel may get no closer to perfection.

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 Mattel 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. Motley Fool newsletter services have recommended Disney and Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.