Is Diamond Foods, Inc. (DMND) Destined for Greatness?

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 Diamond Foods, Inc. (NASDAQ:DMND) fit the bill? Let’s take a 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 Diamond Foods, Inc. (NASDAQ:DMND)’s 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 take a look at Diamond Foods, Inc. (NASDAQ:DMND)’s key statistics:

DMND Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	50.6%	Pass
Improving profit margin	(276.1%)	Fail
Free cash flow growth > Net income growth	(77.8%) vs. (260.2%)	Pass
Improving EPS	(226.2%)	Fail
Stock growth (+ 15%) < EPS growth	(46.5%) vs. (226.2%)	Fail

Source: YCharts.
*Period begins at end of Q1 2010 (Jan. 30).

DMND Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(186.5%)	Fail
Declining debt to equity	282.5%	Fail
Dividend growth > 25%	Suspended in 2012	Fail
Free cash flow payout ratio < 50%	None	N/A

Source: YCharts.
*Period begins at end of Q1 2010 (Jan. 30).

How we got here and where we’re going
Anyone who’s followed Diamond Foods, Inc. (NASDAQ:DMND)’s perilous saga over the past few years should not have expected the company to turn in a particularly great performance on these tests. Two out of eight passing grades (the final grade is exempted due to the dividend’s suspension) is about par for the course, but this low starting point offers the company ample room for improvement over the next year. The company’s surprise quarterly profit has boosted shares to their highest level of 2013, but there’s a long way to go before Diamond can recapture its pre-scandal peak.