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 City Telecom HK (Nasdaq: CTEL) 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 City Telecom.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.3% Fail
  1-Year Revenue Growth > 12% 6.5% Fail
Margins Gross Margin > 35% 87.6% Pass
  Net Margin > 15% 13.8% Fail
Balance Sheet Debt to Equity < 50% 8.6% Pass
  Current Ratio > 1.3 2.17 Pass
Opportunities Return on Equity > 15% 14.9% Fail
Valuation Normalized P/E < 20 24.42 Fail
Dividends Current Yield > 2% 3.6% Pass
  5-Year Dividend Growth > 10% 94.3% Pass
       
  Total Score   5 out of 10

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

With a score of 5, City Telecom posts an average showing. Although the company isn't familiar to most U.S. investors, the stock bears a strong resemblance to telecom companies around the world.

City Telecom provides telephone and broadband service to its Hong Kong customers. Through its Hong Kong Broadband Network subsidiary, the company offers a range of speeds for Internet access, as well as Wi-Fi hotspots around the city. It also offers access to 80 television channels to subscribers.

Looking at its financials, City Telecom shares general attributes with its industry peers. Look at AT&T (NYSE: T) and Verizon (NYSE: VZ), for instance, and you'll see the same strong dividends and relatively slow growth, with AT&T's revenue growth coming largely from mergers with BellSouth and Cingular. Similarly, France Telecom (NYSE: FTE) has seen revenue decline in the past five years, but it still produces a healthy payout.

What's impressive, though, is that City Telecom has a lower debt load than its global counterparts. Yet despite not using leverage, its return on equity is above that of Verizon and France Telecom.

City Telecom isn't the most exciting business in the world, but it's a solid performer and has seen its shares rise strongly over the past several years. That may not be perfect, but it's something that many dividend-seeking investors find attractive right now.

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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. France Telecom is a Motley Fool Income Investor pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.