I think we all know by now that although demand for new LCD TVs is red-hot, a supply glut has led to lower prices and created a split between the strength of the market itself and the benefits flowing to the suppliers of that market.

Nevertheless, LG.Philips (NYSE:LPL), co-owned by Korea's LG Electronics and Philips (NYSE:PHG), announced fourth-quarter results that managed to surpass analyst expectations. Sales increased by 53% in the quarter to more than $3 billion, and earnings jumped from about $35 million last year to $328 million in this quarter. (Fools should note that the exact amounts of earnings in dollar terms may vary between news reports, since different authors may use different exchange rates.)

Given the speed with which this market moves, you can make a fair case that year-on-year comparisons really don't tell you all that much about the business. Fair enough. LG.Philips posted 8% sequential revenue growth this quarter as a solid high-single-digit increase in shipments (as measured by square meters of screen shipped) offset a modest decrease (0.5%) in the average selling price. Also helping matters a bit is that TVs made up a higher percentage of the company's overall sales this quarter.

While LG.Philips' outlook wasn't exactly what I'd call glum, it wasn't remarkably rosy, either. The company expects further mid-single-digit price erosion in the first quarter, but it hopes to offset that with a similar increase in shipments. In other words, it will basically be treading water.

A bigger concern to me, though, is the seemingly never-ending arms race in this industry. LG.Philips had to shell out about $4.2 billion in capital expenditures last year after spending about $3.9 billion in the year prior. Likewise, producers such as Sharp, Samsung, and AU Optronics (NYSE:AUO) are spending big coin on new facilities and machinery and looking to duke it out on the shelves of stores like Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT).

The trouble is, though, I'm not sure that this heavy (and apparently ongoing) capital investment is really ever going to pay off in free cash flow generation. And that's the risk for the sector as a whole -- Best Buy is going to make money, and so is a neutral supplier such as Corning (NYSE:GLW), but are LG.Philips and AU Optronics ever going to be able to get far enough ahead of the curve to earn solid rates of return on that invested capital?

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).