Is General Electric 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 General Electric's (GE -1.75%) recent results tell us about its potential for future gains.

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

Is GE 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 GE'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 GE's key statistics:

Source: GE Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q4 2009.

Source: GE Return on Equity data by YCharts.

Source: YCharts. * Period begins at the end of Q4 2009.

How we got here and where we're going
GE started off with a thud thanks to declining revenue and free cash flow, but strong equity-based metrics and a sustainably growing dividend bring the industrial giant back to a respectable six out of nine passing grades. That free cash flow drop is a bit worrisome, as is GE's stock price outpacing its earnings per share. What's on the horizon for GE that might improve its score for next time?

Based on its latest earnings report, things appear to be moving in the right direction, albeit very slowly. Revenue is barely growing ahead of inflation, and margins are expanding at anemically slow levels. The brightest spot continues to be its energy divisions, particularly renewable energy. As the largest wind-turbine manufacturer in the country, GE is well-positioned to take advantage of continuing interest in the sector -- particularly now that the wind-energy tax credit has been extended through 2014. GE has been also bolstering its wind-energy efforts with an investment in a number of French wind farms.

That's not to say that the company is neglecting traditional energy. With $15 billion in annual revenue, GE's oil and gas segment is just under half as large as fracking pioneer Halliburton (HAL 1.60%) and only $5 billion behind third-place Baker Hughes (BHI). Both of those companies are about a century old , so to be approaching competitive scale with them so quickly is impressive -- and a bit worrying for shareholders in the old guard, I would imagine. GE's already signing big deals left and right, including a half-billion dollar contract with Brazil's Petrobras (PBR -0.70%) to supply offshore drilling equipment and services at four facilities.

GE's also got its hand in some interesting next-gen technology, particularly the industrial Internet, which could be the connecting backbone that ties all of GE's disparate manufacturing and services segments together. Data analytics is still a young industry, and the opportunities for optimization are immense. Whether it occurs on the factory floor, in the air (on the wing of one of Boeing's (BA 0.01%) 787s... whenever all those little problems, like spontaneous fires, happen to be fixed), in the field, or in the lab, the application of smart data to industrial processes is bound to improve GE's performance.

Boeing could become a thorn in GE's side as its 787 Dreamliner program suffers from more delays and more worrisome defects. That could undermine GE's purchase of Avio, the Italian aeronautics company that was supplying components for the GE engine installed on many 787s. A drag on the aviation segment, coupled with the ongoing drawdown in GE Capital and a potential hiccup in wind orders thanks to congressional foot-dragging on the tax credit, could create the zero-growth environment CEO Jeffrey Immelt warned of late last year.

Putting the pieces together
Today, GE 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.