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Is Krispy Kreme Doughnuts (KKD) 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 Krispy Kreme Doughnuts (NYSE:KKD) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Krispy Kreme Doughnuts (NYSE:KKD)

What we’re looking for
The graphs you’re about to see tell Krispy Kreme’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 Krispy Kreme Doughnuts (NYSE:KKD)’s key statistics:

KKD Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 29.8% Fail
Improving profit margin 36.7% Pass
Free cash flow growth > Net income growth 803.9% vs. 831.3% Fail
Improving EPS 1,050% Pass
Stock growth (+ 15%) < EPS growth 367% vs. 1,050% Pass

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

KKD Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity 140.3% Pass
Declining debt to equity (84.8%) Pass

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

How we got here and where we’re going
Krispy Kreme Doughnuts (NYSE:KKD) got off to a piping hot start, but it was tripped up with narrow misses on both the revenue and free cash flow analysis. That isn’t enough to call this stock stale, as Krispy Kreme earned five out of seven passing grades regardless, and it has a very good chance to gain a perfect score next time around. How might Krispy Kreme push its revenue even higher over the next few quarters?

The donut chain has a few hidden weapons that won’t require higher revenues for success at all. My fellow Fool Asit Sharma pointed out last year that a hefty deferred tax asset will help keep tax rates glued to the floor for some time. That’s great news for Krispy Kreme Doughnuts (NYSE:KKD)’s free cash flow metric as well as its bottom line — this might be one way that Krispy Kreme earns its sixth passing grade.