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 General Electric (NYS: GE) 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 General Electric.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(2.9%)

Fail

 

1-Year Revenue Growth > 12%

(5.5%)

Fail

Margins

Gross Margin > 35%

35.4%

Pass

 

Net Margin > 15%

9.4%

Fail

Balance Sheet

Debt to Equity < 50%

337.0%

Fail

 

Current Ratio > 1.3

2.25

Pass

Opportunities

Return on Equity > 15%

11.3%

Fail

Valuation

Normalized P/E < 20

27.62

Fail

Dividends

Current Yield > 2%

3.3%

Pass

 

5-Year Dividend Growth > 10%

(9.5%)

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at General Electric last year, the company has given back one of the two points it earned from 2010 to 2011. Earnings multiples rose precipitously, but shareholders certainly didn't mind, as the stock gained about 30% over the past year.

General Electric has a long history as an industrial conglomerate, with a wide range of businesses and a solid brand. That has often served it well, although it has occasionally also gotten the company in trouble, as GE discovered during the financial crisis with its GE Capital division. Lately, GE has made a big push on energy infrastructure, with big investments in renewable energy through its wind turbine production, going head-to-head against Siemens (NYS: SI) .

But a more recent move from GE has made some wonder if the company's timing is off. In the midst of a slowdown in Asian growth, GE bought Australia's Industrea and entered the mining equipment business. With existing industry giants Joy Global (NYS: JOY) and Caterpillar (NYS: CAT) having difficulties navigating the impact of China's slowdown and the accompanying reduction in mining-equipment growth, the question is whether GE was able to pick up a well-timed bargain or if things will keep getting worse. If BHP Billiton's (NYS: BHP) declaration that the end of the mining boom has already happened, GE could be in for a world of hurt.

Late last month, GE disappointed investors in its earnings report. Despite solid numbers, the company gave forward guidance that watered down previous investor enthusiasm. Nevertheless, if GE can put in performance in 2013 that's anything like its big win this year, shareholders should continue to be pleased.

For GE to improve, it needs to get revenue moving in the right direction again and start working on improving internal efficiency. If it can do so, GE has plenty of potential to become stronger.

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.

A short article can only scratch the surface of what GE's up to right now. If you're a GE investor, you need to understand everything the company's up to as well as all of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE, and you'll receive continuing updates as major events unfold during the year. To get started, click here now.

Click here to add General Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has General Electric Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric and Joy Global. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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