It seems Mr. Market was in a forgiving mood last week, and that was good news for Lincoln Educational (NASDAQ:LINC) investors.

Despite issuing some pretty disheartening earnings news in its fourth-quarter and full-year report earlier this month, shares of Lincoln had climbed as much as 9% higher by the time trading closed on U.S. markets Friday. Then again, it wasn't until Friday that the full bad news broke, when Lincoln filed its 10-K form with the SEC. More on that in a bit.

But first, the highlights. For the year, Lincoln managed to juice its sales 7% higher on the backs of a tuition hike and a pair of acquisitions (of Euphoria Institute and New England Institute of Technology at Palm Beach, each of which brought with it new revenue streams). Absent these factors, we would have seen sales rise a mere 2%, as the student population slumped 4%. The "inorganic" growth contributed 5% worth of Lincoln's revenue gains, and erased the student shortfall, growing the total student population by 1% by year-end. Even so, greater spending on books, tools, and marketing -- and of course the cost of buying the two new schools -- resulted in profits per diluted share declining 21% in comparison to fiscal 2005.

Worse, the situation appears to have deteriorated as the year progressed. Comparing Q4 results to results for the year overall, we see that sales growth slowed at the tail end of the year (to 5%), while the slide in profits accelerated (to 23%).

Margin-wise, the firm ended the year placing third-to-last among the most prominent for-profit educators, its 8.7% operating margin besting only Corinthian's (NASDAQ:COCO) 4.5% and DeVry's (NYSE:DV) 8.3%. The company fell short of the double-digit profit margins boasted by rivals such as Apollo Group (NASDAQ:APOL), Career Education (NASDAQ:CECO), ITT (NYSE:ESI), and Universal Technical Institute (NYSE:UTI).

Guiding lights
So why is the stock up? Perhaps investors liked Lincoln's forward guidance. Predicting 7% revenue growth to about $345 million, and 8% profits growth to roughly $0.65 per share in fiscal 2007, the company bested analyst forecasts on both counts.

More bad news
The rest of the bad news here comes in two flavors: optimism and realism. Optimistically, Lincoln predicts that essentially all of this year's growth will come in the second half. In the first half, we're told to expect essentially flat sales growth and a net loss under GAAP.

As for realism, this Fool couldn't help but notice that Lincoln neglected to provide a cash flow statement with its earnings release, revealing its cash flow situation only when the 10-K was filed on Friday. This document showed that, from a cash-profits perspective (as opposed to GAAP accounting profits), for the third year in a row, capital expenditures declined, to $19.3 million. Unfortunately, the firm also generated its lowest level of operating cash flow in three years -- $15.2 million. Result: negative free cash flow for the first time in at least five years.

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Fool contributor Rich Smith does not own shares of any company named above.