Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues, with defense contractors such as General Dynamics (NYSE: GD), L-3 Communications (NYSE: LLL), and Northrop Grumman (NYSE: NOC) displaying particular interest in buying back their own shares. Yesterday, a smaller player in this market (and a bigger player in others) joined in the fun, as Spartan Motors (Nasdaq: SPAR) announced its own repurchase of 250,000 shares.

Predicting "a record 2007 fourth quarter and year-end driven by growth in all three of its primary product lines-luxury motorhome chassis, emergency rescue and specialty vehicles," Spartan confirmed that it spent approximately $1.9 million on share repurchases in December alone. That's one quarter of the total number of shares authorized for repurchase back in July, made at prices significantly north of where the shares trade today. What's more, management noted that its "best use of cash" will include continued buybacks going forward.

But just how much "cash" does Spartan have to play with now? (Can it pay?) And are further buybacks really the "best use" for that cash? (Should it pay?)

Can it pay?
I have serious doubts about Spartan's ability to match actions to words here. The last we heard from the company, it had less than $4 million in cash in the bank, against nearly $45 million in long-term debt. What's more, while Spartan reported nearly $20 million in profits over the last year, its free cash flow for the last 12 months ran negative, to the tune of $47 million. With little cash in the kitty, and little cash coming in, I don't see how Spartan can keep on buying back shares without taking on debt.

Should it pay?
But assuming management takes on the debt, or works out the kinks in its cash flow, would buybacks then be advisable? Management argues that "Despite the current uncertain economic conditions in 2008, we have multiple product lines supporting our diverse business model." CEO John Sztykiel argues that its motorhome chassis business can survive high oil prices because it caters to the luxury market, which is less affected by economic downturns. But try telling that to Spartan customers Thor (NYSE: THO), whose sales were up a bare 5% last quarter, or Fleetwood (NYSE: FLE), whose sales were down 7%.

Sztykiel says: "Emergency-rescue vehicles must still respond to calls for help every 20 seconds, regardless of the economy." Yet the housing crash is already cutting deeply into municipal tax bases across the country, which may encourage municipalities to cut back on, or at least delay, fire engine purchases until their tax bases shore up.

Sztykiel and I seem to agree on only one point -- that "the current backlog and the expectation of additional subcontract orders in the near future from our MRAP military customers" will generate "substantial growth" for Spartan's specialty vehicle segment in 2008. But even there, the military's rumblings about paring back its MRAP orders has hit the stocks of Spartan customers like Force Protection (Nasdaq: FRPT) in recent months.

All in all, I have to question Spartan's wisdom in spending so large a chunk of its extremely meager war chest on share buybacks, here on the cusp of a nationwide recession. Sure, from a pure GAAP accounting perspective, Spartan's stock looks ridiculously cheap. I mean, a 12 P/E on a company that's expected to grow its profits 19% per year for the next five years? How great is that?! But until the company proves that it can generate free cash flow sufficient to both run its business and pay for its stock purchases, buybacks look to me like a risky gamble.

The good news: In just one month, Spartan gets its chance to prove me wrong, and reassure its investors that management hasn't been sucking too long on the tailpipe. When Q4 earnings come out in February, Fools should check whether inventories are starting to diminish, and whether accounts receivable are dropping. Since Spartan tends not to include cash flow statements with its earnings releases, these two lines will be your best and earliest clues to any change in the company's cash-burning ways.

Buybacks are all the rage these days. Get the lowdown on the whos, whats, and whys of the buyback binging at:

Fool contributor Rich Smith owns shares of Force Protection, which is also a recommendation of Motley Fool Rule Breakers. Want to know why we recommended it? Grab yourself a free, 30-day trial to the newsletter and we'll be glad to tell you. The Motley Fool has a disclosure policy.