Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Francesca's Holdings (Nasdaq: FRAN) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Francesca's Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 56.5%* Pass
  1-Year Revenue Growth > 12% 48.5% Pass
Margins Gross Margin > 35% 62.9% Pass
  Net Margin > 15% 12.2% Fail
Balance Sheet Debt to Equity < 50% 43.3% Pass
  Current Ratio > 1.3 1.79 Pass
Opportunities Return on Equity > 15% 98.6%** Pass
Valuation Normalized P/E < 20 42.01 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes. *3.25-year growth rate. **Based on most recent shareholder equity.

With six points, Francesca's Holdings puts up a good score. Even in a tough retail environment, the young-adult-oriented retailer has put up some impressive growth numbers in recent years.

Francesca's just went public less than a year ago, but it's already drawing favorable comparisons to lululemon athletica (Nasdaq: LULU) and rue21 (NYSE: RUE), and not just because all three chains insist on all-lowercase letters for their store names. High growth and strong margins at Francesca's put it head-and-shoulders above most of its competitors, which have struggled to maintain mid-single-digit margins.

Part of Francesca's success comes from its mix of offerings. Rather than just selling apparel, Francesca's has borrowed a page from Coach (NYSE: COH) and Michael Kors (NYSE: KORS) by also including jewelry and accessories within its collections. By having a wide range of merchandise available, Francesca's has built up its appeal to trend-seeking shoppers.

Last week, Francesca's came out with quarterly numbers that led to a big turnaround for the shares. With analyst-beating performance and positive guidance for the current quarter, Francesca's has seen margins expand and has boosted same-store sales by a whopping 15.5%. That's exactly what a company trading at such a rich multiple needs to deliver, quarter in and quarter out.

In high-growth mode, Francesca's won't see its score improve much until it gets to the point at which it considers paying a dividend. But for momentum investors willing to pay premium valuations for a stock with potential, Francesca's deserves a closer look.

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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