Is First Solar 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 First Solar's (FSLR +4.34%) recent results tell us about its potential for future gains.

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

Is First Solar 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.

By the numbers
Now, let's take a look at First Solar's key statistics:

FSLR Total Return Price data by YCharts

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

FSLR Return on Equity data by YCharts

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

How we got here and where we're going
Those familiar with First Solar's progress through the past few years shouldn't be surprised by its lousy two-pass performance. The solar industry has been in a widespread funk since its peak several years ago -- efficiency leader SunPower (SPWR +0.00%) earned similar marks on this analysis last month, with more resistant free cash flow levels, but a much worse decline in its return on equity.

Where SunPower focuses on efficiency, First Solar's always touted its low costs per watt. Can both strategies succeed? Will First Solar's low-cost advantage make up for its less-effective technology? Utilities may be answering the latter question in the affirmative. Nuclear-power-focused utility Exelon (EXC +0.24%) is getting its feet wet with a Maryland solar facility that will use First Solar's panels. NextEra Energy (NEE +0.57%) is planning a much larger solar plant, and Fool contributor Travis Hoium points out that First Solar's combination of manufacturing capacity and low panel costs make it the logical partner.

First Solar also happens to lead the global solar industry in both its debt balances, and in its margins. No other company comes close, and none even have a positive net debt balance (cash minus total debt). Most Chinese solar manufacturers are in truly dire straits and, with a solar trade war on the horizon, First Solar will have less subsidized competition to worry about as the American market starts to shine. Europe is even contemplating penalties against the Chinese solar industry. LDK Solar (NYSE: LDK), Suntech Power (STP +0.00%), and Trina Solar (NYSE: TSL) have all received several billion dollars in government loans, and yet remain far less viable as global enterprises than First Solar. Tariffs and trade wars could just be the nail in the coffin.

First Solar's got a pretty low bar to get over these days. However, it must continue to make technological improvements, as no one else is standing still. Having the lowest cost per watt may not mean much once buyers do the math and realize that high-efficiency panels can actually produce energy at a lower net cost.

Putting the pieces together
Today, First Solar has few 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.