As a kid, you knew the houses in your neighborhood that passed out awesome treats. In my neighborhood, there was one house that gave away full-size candy bars. Needless to say, we started our trick-or-treating there.

Then one year, they passed out homemade treats. We appreciated their efforts, but we wanted Snickers bars. The next year, they went back to candy, but they were the miniature ones. Were things getting back to normal?

When I looked at Fossil (NASDAQ:FOSL) through the earnings-quality lens for my Halloween Trick, I was able to trace its stock price decline back to some margin and inventory issues. But can we also use earnings quality to find companies whose problems may be behind them?

Columbia Sportswear (NASDAQ:COLM), a Motley Fool Hidden Gems recommendation, may be ready to pass out some full-size candy bars soon. Earlier this year, Columbia produced too much inventory. Slashing prices and reducing margins caused the company to miss its forecast, sending the stock down. But what's happened since then?

($in mil.)

LTM 3/31/
04

LTM 6/30/
04

LTM 9/30/
04

LTM 12/31/
04

LTM 3/31/
05

LTM 6/30/
05

Net Inc.

$125.2

$126.5

$131.5

$138.6

$140.0

$135.6

Chg. in Acc. Rec.

($29.5)

($5.1)

($46.9)

($51.4)

($51.3)

($21.0)

Chg. In Inv.

($6.8)

($25.0)

($25.1)

($32.9)

($32.5)

($3.9)

Cash from Ops.

$138.9

$162.4

$106.6

$93.7

$108.7

$140.9


The data above, provided by Capital IQ, show how Columbia used lots of cash to fund inventory and receivable growth. Unfortunately, inventory and receivables grew faster than sales, sending cash flow from operations (CFFO) below net income.

Again, net income rising faster than CFFO does not guarantee that some miscreant is going to toilet-paper your portfolio. But it should always get an investor's attention, because any slipup in execution will wreak havoc on the income statement -- and the stock price.

But with inventory and receivables on the decline (no need to keep stuff in the stores and warehouses), are things ready to get back to normal?

I hate to have to wait for another quarter of data, but that's the only way we'll really know whether things will turn around soon. However, Columbia is a quality company that has been around for a long time, making products that people like. Since the Boyle family controls 62% of the company, I am confident that they want to put this misstep behind them as quickly as possible, especially with competitors like North Face, Wolverine Worldwide (NYSE:WWW), DeckersOutdoor (NASDAQ:DECK), and Timberland (NYSE:TBL) still breathing down their necks.

Today, Columbia sells at P/E and enterprise value-to-operating earnings (EV/EBIT) multiples it hasn't seen since 1998. As of the end of the second quarter, the company had $243 million in cash, with only about $20 million in debt.

Cheap, solid, and unloved is a good combination for a value investor. If enough investors stay away from the Columbia house this Halloween, you may be able to enjoy those full-sized candy bars all to yourself.

Good luck, and Happy Halloween, Fools!

Columbia and Deckers Outdoor are Motley Fool Hidden Gems recommendations. Tom Gardner serves up tasty small-cap treats all year for investors -- not just for Halloween! Take a free trial today to learn more.

David Meier owns shares of Deckers Outdoor but holds no financial position in any of the other companies mentioned. The Fool has a disclosure policy.