As I was (figuratively) strolling the market other day looking for a good investment opportunity, I nearly tripped over what appeared to be a too-good-to-be-true deal: Revlon (NYSE: REV), at a very low multiple -- under 3! I started to get excited but stopped to wonder: Did I just stumble upon a real bargain, or was there a good reason this venerable cosmetics company was being ignored?

Compared to what?
First, let's put Revlon in a lineup with its competitors, Estee Lauder (NYSE: EL), Avon (NYSE: AVP), and Elizabeth Arden (Nasdaq: RDEN). That P/E really jumps out at you, doesn't it?

Company

P/E

Revlon

2.6

Estee Lauder

29.3

Avon

18.7

Elizabeth Arden

22.9

There is, however, a disturbing trend if you look back over the last ten years of Revlon's sales figures, which are essentially flat until 2007, when they steadily declined through 2009. Then in 2010, sales came back up, but only to the level at which they were in 2001. This doesn't exactly scream "Buy me, buy me!" And not surprisingly, not many investors did.

They did, however, start to notice Revlon right after the company's 2010 earnings came out in February, boosting the stock 35% in three days. But, even though that report showed an increase of 2% in total sales over the previous year, it included a sobering decrease of 2.5% in U.S. sales.

Revlon's balance sheet is another problem, a disappointment in how much more indebted Revlon is than its competitors. Its towering 229% debt-to-capital ratio dwarfs the more reasonable 20% to 40% ratios of Estee Lauder and Elizabeth Arden, respectively. Unfortunately, Revlon's high debt load has been a long-term problem, starting in 1996 when it once again became a public company.

Even if Revlon's stagnant sales history and black hole of debt weren't enough to convince me to step over that low P/E and keep on walking, here's something that makes me want to run: That low P/E is essentially bogus, produced by a huge tax benefit due to a reduction in a deferred tax asset, which considerably inflated Revlon's earnings. Excluding this benefit, therefore, makes the P/E closer to 13 – and it had no effect on the actual cash flowing into the business.

This gave me ...

Some cause for pause
Which wasn't helped when the company's Chief Financial Officer Steven Berns accounted for the stronger overseas sales because of "favorable foreign currency fluctuations versus the U.S. dollar ... When there is a weaker U.S. dollar, it makes it favorable for those [foreign] markets to purchase from [our US manufacturing facility]."

On top of that, even though Revlon's margins looked good in 2010, Mr. Berns admitted they too were positively affected by foreign currency fluctuations. Here's a breakdown of 2010 margins for Revlon and key rivals:

Company

Gross Margin

Operating Margin

Net Margin

Revlon

65.5%

15.1%

24.8%

Estee Lauder

77.3%

12.7%

7.4%

Avon

62.9%

10.6%

5.6%

Elizabeth Arden

46.9%

6.2%

3.3%

Source: Capital IQ.

So a normal margin here is in the mid-single digits, and it's rare that a company can report net margins higher than operating margins.

Not for me
That accounting sleight of hand on the income statement, turning a huge tax benefit into earnings, though legal, made Revlon's P/E look grossly low. So, I'm keeping my hand on my wallet and not looking back.

Wait, was that an oink I just heard?

Fool contributor Dan Radovskydoes not own any of the stocks mentioned in this article and will watch where he's going on his next random walk.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.