Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Crocs fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Crocs' story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Crocs' key statistics:


CROX Total Return Price Chart

CROX Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

59.3%

Pass

Improving profit margin

(10.2%)

Fail

Free cash flow growth > Net income growth

(35.8%) vs. 43.1%

Fail

Improving EPS

43.2%

Pass

Stock growth (+ 15%) < EPS growth

4.4% vs. 43.3%

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

CROX Return on Equity (TTM) Chart

CROX Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(31.1%)

Fail

Declining debt to equity

(100%)

Pass

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
We first looked at Crocs last year, and while the shoe-maker earned one of our rare perfect scores last year, it's lost three passing grades in its second assessment to finish up with only four out seven possible passing grades for 2013. The company's margins have collapsed since last year, which has hampered return on equity, and free cash flow has also fallen. These are not good signs, but we shouldn't count Crocs out before first digging a little deeper to see what the company has up its sleeve for the coming year.

Colorful clog maker Crocs disappointed on both top and bottom lines in its latest quarter, because of sluggish back-to-school sales, weaker employment growth, and macroeconomic uncertainty both domestically and abroad. Crocs' same-store sales in the Americas and Japan fell by 8.3% and 16.3%, respectively, but it's still enjoying notable growth in European and Asia-Pacific markets, where customers have taken great interest in the comfortable brand. This recent weakness has led Crocs to underperform the indexes as compared to Deckers Outdoor , Skechers and other shoe-makers -- its growth during our three-year tracking period is now the weakest of any major shoe brand (including shoe outlet Foot Locker :

CROX Total Return Price Chart

CROX Total Return Price data by YCharts

Fool contributor Timothy Green notes that the company is aggressively pushing its retail strategy, and added 95 new stores last year, which boosted retail revenue by 11%.This helps explain Crocs' recent cash-flow problems, as opening so many stores so quickly demands a significant initial outlay. Meanwhile, the company's also trying to diversify itself beyond its trademark clogs. Fool contributor Pratik Thacker notes that Crocs has started offering wedges, loafers, and casual shoes; and its Boat Line, A-Leigh and Huarache sandal have performed well in Europe and Asia, and in growing markets like Russia, Austria and the Nordic countries. Crocs could thrive in 2014 with pending introductions of licensed footwear bearing Duck Dynasty and Star Wars designs. In addition, it has plans to launch a leather-like product called Colorlite, which could help overcome the popular perception of Crocs as the maker of a sort of plastic foam shoe.

Crocs isn't the only one attempting to update its image, however. Foot Locker has been remodeling its stores based on a new store concept "SIX: 02" to attract more female customers. Skechers has moved past the bad publicity of its "toning shoes" that didn't actually tone, and has experienced double-digit growth online and in terms of same-store sales, according to Fool contributor Meetu Anand. Deckers, which relies on its flagship Ugg brand far more than Crocs relies on its clogs, has not much reduced its dependence on this faddish footwear, but its popularity continues to grow thanks to a more diversified sales model. There are multiple avenues to success, and Crocs may find its avenue in 2014. At the moment, it's far cheaper than either Skechers or Deckers, which could offer greater upside in the long run.

Putting the pieces together
Today, Crocs has some 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.

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The article Is Crocs Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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