Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Aqua America's (NYSE: WTR) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Aqua America's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Aqua America's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Aqua America's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Aqua America managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll make sure that Aqua America's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Aqua America's key statistics:

WTR Total Return Price Chart

WTR Total Return Price data by YCharts

Passing Criteria

3-Year* Change


Revenue Growth > 30% 12.1% Pass
Improving Profit Margin 35.3% Pass
Free Cash Flow Growth > Net Income Growth (161.8) vs. 46.7% Fail
Improving Earnings per Share 42.3% Pass
Stock Growth (+ 15%) < EPS Growth 52.5% vs. 42.3% Pass

Source: YCharts. * Period begins at end of Q2 2009.

WTR Return on Equity Chart

WTR Return on Equity data by YCharts

Passing Criteria

3-Year* Change


Improving Return on Equity 23.3% Pass
Declining Debt to Equity 2.4% Fail
Dividend Growth > 25% 22.2% Fail
Free Cash Flow Payout Ratio < 50% NM Fail

Source: YCharts. * Period begins at end of Q2 2009. NM = not material due to negative free cash flow.

How we got here and where we're going
Aqua America's recent free cash flow drop hurts it on two fronts, preventing this stable water utility from earning more than five out of nine passing grades. The company's capital expenditures shot higher in its most recent quarter, so a return to its usual rate of spending should help Aqua America earn a better grade next time around.

Aqua America's attracted a lot of investor interest recently, which helped push its past-year performance close to that of sector leader American Water Works (NYSE: AWK). Aqua America's superior net margins have been a big part of that appeal, as has its consistent earnings growth. American Water Works has greater scale, but size isn't everything, as Veolia Environnement's (NYSE: VE) miserable performance proves. That company's international waste management segments have been a drag, and it's decided to follow the money and refocus on water provision.

Aqua America, along with Veolia and American Water Works, has a place in the PowerShares Water Resources Portfolio (NYSE: PHO), which also tracks manufacturers with a liquid focus -- its largest single holding is Pall (NYSE: PLL), a water-treatment specialist. This industrial weighting has been a drag on the ETF's performance, and Aqua America's beaten it over five-year and three-year holding periods. Aqua's recent slide has made this year the first that's seen the ETF outperform, but not by much.

Putting the pieces together
Aqua America has some of the qualities that make up a great stock, but no stock is truly perfect. These numbers are likely to change over time, so it's important to keep track of Aqua America's progress. The Fool is here to help. When you add Aqua America to your free personalized Watchlist, you'll get updates whenever we uncover any news you'll need.

Aqua America's consistent performance can help your portfolio grow. It may even make you rich, if its stock gains continue as they have for the past three years. There are a number of solid stocks that can make investors great returns over the long term, and the Fool's identified three stocks that will help you retire rich. They combine long-term outperformance, consistently improving financial metrics, and business models that can't be easily replicated. Find out more in the Fool's exclusive free report -- click here for the free information you need.

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.