How should we grade test-prep specialist Princeton Review's (NASDAQ:REVU) earnings report from Wednesday? "B" for "buy," or "F" for "forget about it"?

For the fourth quarter, net sales grew 16.2% to $32.3 million. The company reported an operating loss of $4.7 million, better than the operating loss of $12.5 million in last year's equivalent quarter. Likewise, a net loss of $4.6 million ($0.17 per diluted share) was an improvement over a net loss of $30 million ($1.09 per diluted share) year over year.

For the full year, net sales increased 14.7% to $130.5 million. The operating loss came in at $4.2 million against an operating loss of $13.4 million. The net loss was $4.3 million ($0.16 per diluted share) versus a net loss of $30.8 million ($1.12 per diluted share) for fiscal 2004.

Losses are never good to see, but it looks as though Princeton Review is at least addressing them, given that the red ink on the operating and net-income lines isn't as red anymore. The double-digit expansion of the top-line base is also encouraging -- the amount basically correlated with the quarterly forecast made by the only analyst following the company.

Looking through the numbers on the test-services categories, we see further indication of what might just be an improved situation. For starters, revenues booked for the K-12 services segment shot up by more than 14% in 2005. Likewise, the test-preparation services category increased at an energetic rate -- its revenue line improved by 25.7%.

However, even though Princeton Review is alleviating its dire financial situation, I would not consider buying the stock. It's way too speculative. As Rich Smith pointed out in his Foolish Forecast, this company hasn't created any free cash flow value for its shareholders, and FCF is what eventually rewards shareholders, in the form of share repurchases, dividends, and/or reinvestment in solid business ventures. Without a good history of FCF, it's tough to make a case for a company that still shows losses, even if they are narrowing. You need cash to keep up with competitors like Washington Post's (NYSE:WPO) Kaplan and Reed Elsevier's (NYSE:ENL) Harcourt. Something else to consider: The gross profit margin at Princeton Review declined year over year, from 64.3% to 62%.

My gut tells me that the test-preparation industry will become more valuable over time, since college educations are arguably more important than ever before -- a degree from a prime university can open a lot of doors, after all. So Fools can continue to keep track of Princeton Review's progress, but until the next cash flow statement becomes available, I wouldn't think about putting this stock in the homeroom of my portfolio.

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Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.