For outsiders looking in, it's been a bumpy year for LowranceElectronics (NASDAQ:LEIX). Even I briefly began to wonder whether the maker of sonar and GPS equipment had wandered off course when, following a secondary offering of shares, its inventory and debt ballooned to fund the buildout for its portable and automotive GPS products.

But it seems like a little patience is beginning to pay off for this competitor to Garmin (NASDAQ:GRMN) and Pioneer (NYSE:PIO) -- the cost of the company's expansion has begun to bear fruit. Annual sales increased a total of 31%, but net income increased only 7.5% because of lower margins on new products, increased expenses associated with Sarbanes-Oxley, and to a lesser extent increased borrowing costs.

You'll find the majority of reasons for optimism on the balance sheet. Despite inventory and debt ballooning earlier, both have now settled at more reasonable levels; debt in particular is down to $7.2 million versus $26.7 million just six months ago. Since the company's cash balance is also up from six months ago, it seems Lowrance enjoyed a year of decent free cash flow, though it did not include a cash flow statement in its earnings release.

Lowrance isn't yet in the clear. Inventory and accounts-receivable growth outpaced sales growth for the year, and the secondary offering means that on a per-share basis, shareholders earned less this year than last. In addition, the company's new products have lower margins, pulling the company's gross margins down by a full 5%. However, as the year has gone by, the financials have gradually improved.

As a member of the Motley Fool Income Investor team who likes to dabble in small caps, I like that Lowrance has begun sharing its free cash flow with shareholders in the past year. Since I expect the company's free cash flow to continue growing, I don't find it unreasonable that the payout could continue to expand from its current 2.6% yield.

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Nathan Parmelee owns shares in Lowrance, but has no financial interest in any of the other companies mentioned. Lowrance is a Motley Fool Stocks 2005 recommendation. The Motley Fool has an iron-claddisclosure policy.