Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

• The current price multiples.
• The consistency of past earnings and cash flow.
• How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Select Comfort (Nasdaq: SCSS) might be.

The current price multiples

First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more-advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Select Comfort has a P/E ratio of 26.2 and an EV/FCF ratio of 21.4 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Select Comfort has a P/E ratio of 93.0 and a five-year EV/FCF ratio of 41.4.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

Select Comfort is 0 for 4 on hitting the ideal targets, but let's see how it compares against some competitors and industry mates.

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Select Comfort 26.2 21.4 93.0 41.4
Sealy NM 12.8 12.7 10.0
Tempur-Pedic 21.4 22.8 35.4 29.8
Ethan Allen 28.3 13.0 83.6 20.4

Source: S&P Capital IQ; NM = not meaningful due to losses.

Numerically, we've seen how Select Comfort's valuation rates on both an absolute and relative basis. Next, let's examine …

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Select Comfort's net income margin has ranged from -11.5% to 8.1%. In that same time frame, unlevered free cash flow margin has ranged from -4.5% to 12.5%.

How do those figures compare with those of the company's peers? See for yourself:

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, Select Comfort has tallied up four years of positive earnings and four years of positive free cash flow.

Next, let's figure out …

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks.  But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Select Comfort has put up past EPS growth rates of 4.7%. Meanwhile, Wall Street's analysts expect future growth rates of 19.3%.

Here's how Select Comfort compares to its peers for trailing five-year growth (due to losses, Sealy's trailing growth rate isn't meaningful):

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Select Comfort are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 26.2 P/E ratio and we see that its already high one-year price multiples get even higher on a five-year basis. The good side of this is that we see Select Comfort's earnings and free cash flow rebounding from a disastrous 2008 (fiscal year ending January 2009) that saw losses.

We also see that Select Comfort's balance sheet is back to a net cash position (i.e. more cash than debt). On the negative side, our CAPS community rates it just two stars out of five and its profitability will have to grow a good bit to justify its price tag.

But all this is just a start. If you find Select Comfort's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to MyWatchlist to find all of our Foolish analysis.

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