Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Sturm, Ruger's (NYS: RGR) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Sturm, Ruger's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Sturm, Ruger's free cash flow has grown in comparison to its net income.


A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Sturm, Ruger's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Sturm, Ruger managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Sturm, Ruger's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Sturm, Ruger's key statistics:

RGR Total Return Price Chart

RGR Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue Growth > 30%

66.9%

Pass

Improving Profit Margin

47.1%

Pass

Free Cash Flow Growth > Net Income Growth

28.9% vs. 124.3%

Fail

Improving Earnings per Share

122%

Pass

Stock Growth (+ 15%) < EPS Growth

316.3% vs. 122%

Fail

Source: YCharts.
*Period begins at end of Q3 2009.

RGR Return on Equity Chart

RGR Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving Return on Equity

12.6%

Pass

Declining Debt to Equity

None

Pass

Dividend Growth > 25%

297.9%

Pass

Free Cash Flow Payout Ratio < 50% 

43.6%

Pass

Source: YCharts.
*Period begins at end of Q3 2009.

How we got here and where we're going
Sturm, Ruger earns a very healthy seven of nine possible passing grades, with its only weak spots in a stock price that's soared past the growth in earnings per share and a level of free cash flow that hasn't kept pace with earnings. However, Sturm, Ruger's current free cash flow levels are enough to sustain its dividend, even after a huge increase in payouts over the past three years. Can this gun maker keep shooting out the lights, or will it backfire as an investment? Let's dig deeper.

In a tongue-in-cheek article at the start of the year, I offered Sturm, Ruger and its fellow gun maker Smith & Wesson (NAS: SWHC) as stocks that would profit from doomsday scenarios such as the impending Mayan end of days. Since that time, Smith & Wesson's shares have more than doubled, while Sturm, Ruger has put up an impressive 50% gain that still pales in comparison with its peer's performance. This year has been a monster for Smith & Wesson, which has climbed back to profitability over the past four quarters. Sturm, Ruger's income has risen as well, but the company has been long-term profitable. It's not as exciting, but it's usually more rewarding for patient investors.

Sturm, Ruger also benefits from one of the best net margins in the personal-protection industry, easily trouncing resurgent Smith & Wesson and TASER (NAS: TASR) , which also recently returned to profitability. Its net margin also is double that of Winchester parent Olin (NYS: OLN) , but that company has other market segments that change the variables somewhat -- the Winchester segment boasted a 10% net margin before taxes in its latest quarter, but its chlor alkali segment is far more profitable. As my fellow Fool John Del Vecchio points out, Sturm, Ruger's also done a better job improving its gross margin over time than Smith & Wesson has.

Fool contributor Michael Lewis points out two huge trends in Sturm, Ruger's favor: Democrats in the White House tend to spur gun buying, and between 70 million and 80 million Americans currently own a firearm. With the re-election of President Obama, and with handguns representing only a third of firearms owned in the United States, there's ample room for growth, whether you want to chalk it up to gun-control hysteria or simply a heightened level of general interest. That might be enough to earn Sturm, Ruger a rare perfect score next time around.

Putting the pieces together
Today, Sturm, Ruger has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

A number of Wall Street analysts overlooked the potential of Sturm, Ruger years ago. They simply couldn't see such a small stock -- it flew right under their radar! The Fool's best analysts don't make that mistake. Some of our favorite stocks are the ones Wall Street's too rich to notice. That gives you a much higher ceiling when the big money finally catches on. We're offering you the opportunity to discover three small-cap stocks with huge potential in our latest free report on "Middle-Class Millionaire-Makers." All the information you need to buy your next great stock is available at no cost when you click here to claim your free report now.

Keep track of Sturm, Ruger by adding it to your free stock Watchlist.

The article Is Sturm, Ruger Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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