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 Enerplus' (NYSE:ERF) recent results tell us about its potential for future gains.

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

Is Enerplus 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 Enerplus' 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 Enerplus' key statistics:

ERF Total Return Price Chart

ERF Total Return Price data by YCharts

Passing Criteria

3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

42.8% vs. (211.3%)


Improving EPS



Stock growth + 15% < EPS growth

(42%) vs. (145.7%)


Source: YCharts. * Period begins at end of Q3 2009. EPS numbers start in 2011.

ERF Return on Equity Chart

ERF Return on Equity data by YCharts

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25% 



Free cash flow payout ratio < 50%

Negative FCF


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

How we got here and where we're going
Things don't look very good for Enerplus right now. It avoids a complete goose egg only because free cash flow started from a weaker position than net income. Both numbers are negative now, which is hardly encouraging. What will it take for this company to get back on the right track? Can it be done before its dwindling dividend gets slashed again?

Enerplus' problem is a familiar one to energy sector investors. For months, we've been waiting to see a big rebound in the abysmally low price of natural gas. For months, we've been disappointed. Enerplus is responding to these market conditions by divesting itself of less-productive assets, a strategy similar to nat-gas leader Chesapeake Energy (NYSE:CHK). Enerplus cut its forward outlook as a result, which explains its recent stock slide -- few investors are willing to hold a company suffering long-term weakness.

The company's oil exploration side hasn't enjoyed much in the way of strong prices in 2012, either. West Texas prices per barrel remain below $90, a level that pushed many of Enerplus' peers down in a mass sell-off earlier this fall. Kodiak Oil & Gas (UNKNOWN:KOG.DL) and SandRidge Energy (UNKNOWN:SD.DL), which were once exciting speculative plays, have seen interest wane all year as domestic oil prices stubbornly stay below $100 per barrel. Lower-cost oil is good for American consumers, and for many American businesses, but that doesn't translate to good times for the oil industry. Oil-focused SandRidge is also pondering asset divestitures as well, so there are plenty of signs that smaller producers of all stripes are feeling the pinch.

Neither is Enerplus alone in its dividend woes. The company's monthly payout, which is down by nearly half since the end of 2009, simply can't be sustained with negative free cash flow. Similarly structured Pengrowth Energy (NYSE:PGH) was also recently forced to cut its dividend by similar levels, but Enerplus has devised a clever workaround, offering shareholders dividend payments in the form of additional shares rather than in cash distributions. That might conserve resources, but its viability hinges on Enerplus' ability to get back on track in the years ahead. Otherwise, investors might simply be left holding more worthless shares with no return to show for it.

Putting the pieces together
Today, Enerplus 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.

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 Fool owns shares of and has written put on Chesapeake Energy. 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.