Is Ship Finance International Limited Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Ship Finance International Limited (SFL -1.11%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Ship Finance's story. We'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Ship Finance's key statistics:

SFL Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q4 2010.

SFL Return on Equity (TTM) data by YCharts

Source: YCharts. * Period begins at end of Q4 2010.

How we got here and where we're going
We looked at Ship Finance International last year. It's slipped a bit in today's assessment to finish with only two out of nine possible passing grades. Ship Finance's free cash has been trending in the right direction, which helped it earn a pass where it failed last year -- however, the company's free cash flow payout ratio is now far too high at a mind-blowing 354%. Ship Finance's revenue and net income have both fallen as well during our three-year tracking period. Can this diversified shipper turn itself around and rebound? Let's dig a little deeper to find out.

Ship Finance has been enjoying strong quarterly earnings in recent months on the back of lucrative cash sweep agreements with tanker operator Frontline (FRO -4.87%) for Suezmax tankers and VLCCs, as the crude-oil tanker market has been enjoying a period of growth lately. The company has also raised nearly $300 million over the past two quarters by selling two VLCCs to Frontline for more than $122 million late last year and raising $150 million in new debt during the first quarter of 2014, in addition to refinancing $390 million in debt to lower interest rates. These positive moves have provided momentum for Ship Finance's stock, as nearly all of its modest three-year share price growth has taken place in 2014.

Ship Finance boasts plans to build up its distribution capacity on the back of an asset portfolio of high-quality vessels and strong counterparties. The company completed the acquisition of harsh-environment ultra deepwater jackup rig West Linus for $600 million in the fourth quarter -- this rig is expected to yield higher charter rates now that it's sub-chartered to oil and gas explorer ConocoPhillips (COP -0.41%) in the second quarter of 2014. The company also acquired two Panamax container vessels and seven container vessels in the fourth quarter, plus another nine container vessels and two dry-bulk carriers in the first quarter, bringing its reported fleet size up to 73 vessels.

Ship Finance seems well-positioned to benefit from improvement in the oil-tanker market. The company now sports a fixed-rate charter backlog of approximately $5.1 billion for both vessels and rigs, which are expected to run through an average remaining charter term of 5.7 years. Ship Finance's market position should strengthen with the delivery of four larger container vessels -- now under construction in Korea over the next several quarters -- and from the estimated $80 million in annual average EBITDA that will flow each year from the ConocoPhillips rig charter.

Putting the pieces together
Today, Ship Finance International 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.