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 Disney's (NYSE: DIS) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Disney'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 be reported at a steady rate, we'll also look at how much Disney'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 Disney's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Disney 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 Disney'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 Disney's key statistics:

DIS Total Return Price Chart

DIS Total Return Price data by YCharts

Passing Criteria

3-Year Change*


Revenue Growth > 30% 17.3% Fail
Improving Profit Margin 48.8% Pass
Free Cash Flow Growth > Net Income Growth 40.9% vs. 74.2% Fail
Improving Earnings per Share 77.7% Pass
Stock Growth (+ 15%) < EPS Growth 133% vs. 77.7% Fail

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

DIS Return on Equity Chart

DIS Return on Equity data by YCharts

Passing Criteria

3-Year Change*


Improving Return on Equity 42.7% Pass
Declining Debt to Equity (10.6%) Pass
Dividend Growth > 25% 71.4%** Pass
Free Cash Flow Payout Ratio < 50% 23% Pass

Sources: YCharts and Morningstar. *Period begins at end of Q2 2009. **Growth calculated from 2009 to 2011 annual dividend payments.

How we got here and where we're going
Disney racks up six of nine possible passing grades. Its stock price seems to have outpaced the gains in its earnings per share, and Disney's free cash flow levels haven't matched its impressive net income growth. However, that free cash flow has been more than enough to sustain a rapidly growing dividend.

Disney investors have had an action-packed year, with the company's Marvel brand producing by far the biggest box-office smash of the year in The Avengers. Garnering less press -- but representing perhaps as much long-term potential -- were the House of Mouse's acquisition of an Indian media conglomerate and its partnership with J.C. Penney (NYSE: JCP), which will open more than 500 exclusive Disney mini-boutiques in its stores in the near future.

The company's ESPN brand is more valuable than some competitors in their entirety -- Fool analysts Andrew Tonner and Austin Smith point out that ESPN generates more annual revenue than CBS. Disney's world-famous theme parks are likewise giants in their field. The company's parks and resorts segment generates five times the annual revenue of Six Flags (NYSE: SIX) and Cedar Fair (NYSE: FUN) combined. Even adding cruise-line competitor Royal Caribbean (NYSE: RCL) to the mix doesn't create a family fun vacation behemoth larger than Disney's.

Despite a stock price that's gotten far ahead of its earnings growth, Disney still sports a reasonable 17.1 P/E. That's higher than its five-year P/E average of 15, but not by much, so shareholders aren't likely to see significant pullback unless something truly devastating happens, on the scale of the intergalactic invasion its superheroes repelled this summer.

Putting the pieces together
Disney has quite a few 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 Disney's progress. The Fool is here to help. When you add Disney to your free personalized Watchlist, you'll get updates whenever we uncover any news you'll need.

Some investors might call Disney a "forever stock," and it's certainly got the strength and business chops to thrive for years. It's not the only one, though, and diversity is key -- which is why the Fool's got nine more long-term suggestions. These are the "9 Rock-Solid Dividend Stocks to Secure Your Future," and they've all got the combination of stable growth and attractive yield that's made Disney a market favorite. Find out more in the Fool's free report -- click here to get the information you need, at no cost.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.