Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if IMAX (Nasdaq: IMAX) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at IMAX.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 10.3% fail
  1-Year Revenue Growth > 12% 65.3% pass
Margins Gross Margin > 35% 55.2% pass
  Net Margin > 15% 21.7% pass
Balance Sheet Debt to Equity < 50% 21.8% pass
  Current Ratio > 1.3 1.54 pass
Opportunities Return on Equity > 15% 71.8% pass
Valuation Normalized P/E < 20 58.29 fail
Dividends Current Yield > 2% 0.0% fail
  5-Year Dividend Growth > 10% 0.0% fail
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

IMAX posts a strong score of 6 points. Over the years, the theater operator has gone from a novelty to a must-have part of a successful movie's distribution strategy.

During the early part of its history, you'd typically find IMAX's mammoth screens at unconventional viewing spaces like museums, playing educational documentaries on topics like the space shuttle. But several years ago, the company started distributing mainstream movies in its supersized format, wowing viewers with state-of-the-art technology.

Since then, IMAX has worked to make its premium theaters more accessible. It perfected its digital remastering technology, and its MPX model made it possible to install IMAX screens at traditional multiplexes. As a result, major studios Disney (NYSE: DIS), Time Warner (NYSE: TWX), and Dreamworks Animation (NYSE: DWA) have made IMAX distribution a mainstay in their general releases -- and it's paid off, with IMAX revenue representing an increasingly large part of the overall box office pie.

IMAX is now facing competition from 3-D niche player RealD (NYSE: RLD). But while RealD has gone after maximum growth, IMAX has focused more on maintaining its premium prestige. That earns IMAX above-market ticket prices, which makes its theaters attractive to operators like Regal Entertainment (NYSE: RGC) and helps maintain profitability.

IMAX isn't perfect; its five-year history of earnings shows some bumps in the road, and shares definitely aren't cheaply valued right now. But the company has made a great showing lately, and with strong growth both internationally and here at home, IMAX seems to be setting itself up for a great Hollywood ending.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.