Investors use a lot of different multiples to figure out if a stock is cheap or expensive. Sometimes that can just create confusion. Take Illumina (ILMN -0.51%), for example. The stock is down 60% from its peak to just above $200 per share -- a level it first reached in early 2018. That seems like a discount at first glance. 

But there is a lot going on for the global market share leader in gene sequencing instruments. The pandemic boosted demand for its business while management was making significant investments in developing a new product. Add in that the company is attempting to make an acquisition despite threats from regulators on both sides of the Atlantic and it's hard to make sense of it all. Let's take a look at the company's valuation from a few different angles.

Numbers aren't always what they seem

The price-to-earnings (PE) ratio is probably the most often-cited valuation metric. But relying on it alone can be treacherous. That's because calculating earnings can be tricky. They are subject to all manner of accounting adjustments. Illumina recently reported a loss of $24.26 per share after writing off almost $4 billion of the $8 billion it spent to acquire genomic testing company Grail. It makes earnings appear deeply in the red.

But that write-off is a noncash charge. And earnings have also been whacked by the nearly $600 million management set aside in anticipation of a fine for buying Grail. Regulators in the U.S. and Europe have protested the move and are likely to force a breakup.

Making adjustments for those charges over the past four quarters shows $2.61 in earnings per share (EPS). That's compared to $5.04 in 2021 and the $2.02 to $3.69 analysts have it slated to make in 2023. Zeroing in on the right number for "earnings" isn't as simple as it might seem. And you end up with very different P/E ratios depending on the number you use. The chart below uses full-year earnings -- the last of which is fiscal year 2021 -- and makes the stock look like a buy. Using trailing-12-month EPS essentially doubles this valuation metric. That makes it far less enticing. 

ILMN PE Ratio Chart

ILMN PE Ratio data by YCharts

Cash might not always be king

Adjustments to earnings are why some investors prefer to look at cash. Free cash flow -- cash generated by operations minus capital expenditures -- leaves less to interpretation. By that measure, Illumina looks wildly overvalued. But those capital expenditures that count against free cash flow are what propel future growth. And the company has been ramping up spending for its next-generation sequencing instruments -- NovaSeq X. Ignoring that could cost investors with a long enough time horizon to see the investment pay off.

ILMN Price to Free Cash Flow Chart

ILMN Price to Free Cash Flow data by YCharts

Looking beyond the numbers

Clearly, investing requires a story to go along with the metrics. Otherwise, you could end up buying or selling shares for a reason that doesn't reflect reality over the long term. Right now, the numbers paint a relatively grim picture for Illumina. By the numbers, it seems expensive. And after lowering guidance in its most recent earnings call, management acknowledged a 5% reduction in its global headcount barely a week later. It is also projecting flat growth this year.

But that might not be the red flag it seems. Illumina has routinely gone through cycles around new product launches with year-over-year growth ranging from 6% to 36% in the decade leading up to the pandemic. Although COVID-19 has helped in some areas and hurt in others, CEO Francis deSouza remains confident in the long-term trajectory and estimates closer to 10% revenue growth for next year.

The question investors should be asking is how much earnings and cash flow Illumina can generate even if that growth materializes. With so many unknowns, the answer isn't clear. The stock isn't likely to move much higher until it is.