Is Cliffs Natural Resources Destined for Greatness?

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 Cliffs Natural Resources' (CLF -0.49%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Cliffs' 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 Cliffs' 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 Cliffs' share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Cliffs 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 also make sure that Cliffs' 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 Cliffs' key statistics:

CLF Total Return Price data by YCharts.

Source: YCharts.
*Period begins at end of Q3 2009.

CLF Return on Equity data by YCharts.

Source: YCharts.
*Period begins at end of Q3 2009. NM = not material; negative FCF.

How we got here and where we're going
Cliffs earns a respectable, but not outstanding, five out of a possible nine passing grades. The miner's been hurt by declining free cash flow levels, but its revenue and net income have been strong over the past few years. Unfortunately, those are now in decline as well, as cost pressures and declining industrial demand have combined to put a boot to the company's neck. Can Cliffs climb back up from this cliff? Let's dig deeper to find out.

Cliffs' latest earnings report was seriously disappointing, with just about every important metric moving in the wrong direction. The company's wealth of bad news prompted Foolish mining guru Christopher Barker to encourage investors to wait for better days.

Neither the iron ore nor the coal picture looks particularly rosy, but coal has been particularly hard hit by a combination of global macroeconomic headwinds and the perception that President Obama's clean-energy push will leave coal out in the cold. Cliffs has at least avoided the deep chasm Alpha Natural Resources (NYSE: ANR) and Arch Coal (NYSE: ACI) have fallen into over the past year, as it's the only coal miner with a positive track record over the past four years. That doesn't mean it's in the best financial position -- fellow coal miner Walter Energy (WLTGQ) has done a better job reducing its costs and improving its cash balances, despite a weaker share price  over the time frame we looked at earlier.

Cliffs' saving grace might be in its iron ore operations, thanks in part to the Chinese government's active push to prop up its domestic steelmakers. That's more help than American steelmakers have gotten, and none has had a good year in 2012. Infrastructure is important, but China alone can't buoy the entire industry after a multiyear slowdown. The world needs to start building again, and Cliffs will need to find renewed interest in its coal stockpiles as well, to turn its stock around.

Putting the pieces together
Today, Cliffs has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.