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 JA Solar (Nasdaq: JASO) 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 JA Solar.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 53.2% Pass
1-year revenue growth > 12% (35.6%) Fail
Margins Gross margin > 35% (1.6%) Fail
Net margin > 15% (14.8%) Fail
Balance sheet Debt to equity < 50% 105.2% Fail
Current ratio > 1.3 1.77 Pass
Opportunities Return on equity > 15% (19.1%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current yield > 2% 0% Fail
5-year dividend growth > 10% 0% Fail
Total score 2 out of 9

Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.

Since we looked at JA Solar last year, the company has lost three full points. With a decline of nearly 70% in the past year, the stock isn't getting much sunshine either.

For a long time, just about every player throughout the solar industry had promise. High subsidies and big demand made it viable for a wide range of manufacturers to stay in business. But more recently, those subsidies have started going away, and companies are having to survive on their own to an increasing extent.

The new environment has split the industry in two, with one group in much better shape than the other. First Solar (Nasdaq: FSLR) has remained relatively strong, and SunPower (Nasdaq: SPWR) looks to be in good shape as its high-efficiency business model starts to pay off, despite some reduced guidance for the full year. On the other hand, weak companies like LDK Solar (NYSE: LDK), ReneSola (NYSE: SOL), and Hanwha SolarOne have not only lost money consistently but haven't even managed to eke out a positive gross margin. Unfortunately, JA Solar currently finds itself in the latter group, with negative gross margins as well as big losses.

Moreover, the company has made some strange capital allocation decisions. Despite huge debt and continuing losses, JA Solar announced a big $100 million share repurchase program. Ordinarily, that would be a mark of confidence, but given the spotty financial condition of the company, it looks more foolhardy than smart.

For JA Solar to survive, it needs to get itself back to positive margins as quickly as possible. That'll be tough in the current solar environment, but if it can't, then JA Solar has no hope of reaching perfection.

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.

Learn more about First Solar's prospects in the Fool's latest premium report. Our top solar energy analysts share their viewpoints and will keep you updated with a year of free check-ins. Get your report today.

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