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 Rite Aid's (NYSE:RAD) recent results tell us about its potential for future gains.

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

Is Rite Aid 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 Rite Aid's key statistics:

RAD Total Return Price Chart

RAD Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

141.64% vs. 93.2%


Improving EPS



Stock growth (+ 15%) < EPS growth

22.7% vs. 93.5%


Improving return on equity

Negative equity


Declining debt to equity

Negative equity


Source: YCharts.
*Period begins at end of Q3 2009 (11/2009).

How we got here and where we're going
Rite Aid takes a hit to its final score as negative equity disqualifies two tests. Four out of seven isn't bad, and Rite Aid does appear to be moving in the right direction, as it finally moved into profitability in its most recent quarter. If that continues, the pharmacy chain could improve its score the next time we examine it, and might even be able to pay off some of its massive debt.

It's been a rather up-and-down time for Rite Aid over the last few years. Although its stock has rebounded significantly from 2012's lows, it remains lower than its 2012 highs, reached early in the year on a combination of early debt retirement and the positive results of fallout from the Walgreen (NASDAQ:WBA) and Express Scripts (NASDAQ:ESRX) breakup, which sent prescription customers scurrying to both Rite Aid and top dog CVS Caremark (NYSE:CVS). When the two companies made up, Rite Aid shareholders had less fresh business to look forward to. Since the start of our tracking period, Rite Aid's debt -- currently at $6.2 billion -- has only decreased by about 4%, despite the big news earlier in the year. At this rate, Rite Aid will pay its debts down around the time that mankind discovers warp drive. By that point, pharmacies will probably be irrelevant.

According to research done last year by Shubh Datta, Rite Aid's interest-coverage ratio is only about half what it needs to be to simply cover short-term interest payments. Since this was investigated after Rite Aid retired a chunk of debt, it doesn't indicate a particularly great value. Since Rite Aid has four and a half times as much debt as market capitalization, an investment now would require a certain amount of faith in management's ability to grow. Granted, Rite Aid has grown its bottom line faster than Walgreen has in our tracked time frame, but it still trails both Walgreen and CVS by a large margin, and only has one quarter of profitability behind it. In order to keep moving forward, it's got to convince consumers that it's the better option -- and with a smaller footprint and weaker finances to grow it, it's difficult to see how.

Putting the pieces together
Today, Rite Aid 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.

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.

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