It wasn't the kind of reaction you'd ordinarily expect to an earnings beat.

When Dow Chemical (NYSE:DOW) beat earnings estimates Tuesday morning, you might have thought investors would be pleased to see it following in the footsteps of Dupont (NYSE:DD), Ashland (NYSE:ASH), and Eastman (NYSE:EMN). (And perhaps blazing the way for Huntsman (NYSE:HUN) later this month?)

After all, Dow's $0.18 per share in "adjusted" earnings not only reversed the company's staggering loss of yesteryear. It also beat analyst estimates by a mile. So why, you may wonder, did Dow stock drop as much as 7% after the announcement? More importantly, did the stock deserve to fall?

Answers: Because … and yes.
The market mavens up on Wall Street all have their pet theories for why Dow is Dow(n) post-earnings. Analysts at BB&T (NYSE:BBT) Capital Markets criticize the company's "beat" as insubstantial, and owing to the fact that lower taxes boosted profits by a nickel. (And yet, Dow beat estimates by $0.07 -- not $0.05.) The folks next door at Credit Suisse (NYSE:CS) say it's a simple case of "buy the rumor, sell the news" -- that folks were expecting the beat, and now that they've got it, they're cashing in.

As for me, though, I've got a different view: Dow is dynamite (in a bad way), and it's set to explode.

Consider: For the full year, Dow's sales plunged 22% as the recessionary pendulum swung downwards. The fourth quarter's sales surge shows that it's swinging back up right now, but even so, few analysts believe Dow can sustain even 13% annual earnings growth over the long run. And while 13% growth might not look so bad in light of the firm's projected P/E of 11 (based on next year's hoped-for numbers), there's plenty of reason to doubt the quality of these earnings.

Take cash flow, for example. Dow boasted of generating $2.1 billion in cash from operations last year, but it made $1.4 billion in capital expenditures. The net free cash flow of around $700 million has the company valued with an enterprise value to free cash flow ratio of around 75.

Raise your hand if you think that's "cheap" in light of Dow's limited growth expectations.

Meanwhile, even as sales plummeted, we saw Dow's inventories surge 13% over the course of the year. Trade accounts receivable (unpaid bills) are up 50%. Simply put, Dow's sinking ever-more cash into inventories, and collecting ever less cash from its customers.

Foolish takeaway
This, Fools, is not a recipe for success. To the contrary, it's a volatile mixture, and primed to explode. Investors are right to be heading for the exits.

Fool contributor Rich Smith has no position in own any stocks named above. The Motley Fool has a disclosure policy.