A few weeks back, I analyzed Talisman Energy's (NYSE: TLM) first-quarter results. Though the numbers failed to show strong improvements off recent struggles, I wanted to dig deeper to see the real story going on with this company. What I found wasn't impressive. When it comes to the fundamentals that truly drive stock prices, Talisman looks weak.

Performance so far
Over the years, Talisman's results have flattened out thanks to stagnating production. This does not bode well for investors. In fact, 2010 saw a 2% drop in total production from the previous year. Over the past five years, the company's oil production has dropped more than 17%, even as natural gas production during the corresponding period has risen 11%.

Evidently, Talisman has not been able to take advantage of higher oil prices in recent years, since lower gas price margins have handicapped its growth prospects. Current macroeconomic conditions might hinder the company's efforts to sustain growth.

Operating profit, or EBIT, has fallen over the years. Talisman's compounded annual growth rate for EBIT over five years stands at a negative 17.3%. While future results may improve from here, the company has nonetheless failed to boost operations in the last few years.

Returns matter
How does this affect investors? Barring a temporary spike in 2009, returns on equity have gradually declined over the last couple of years. The current figure of -2.8% is a far cry from the 22.8% ratio the company generated in 2006.

How valuable are the company's resources in terms of future cash flows? Using standardized measures of estimation, future cash flows stand at $10.7 billion at the end of 2010 -- a 29% rise from $8.3 billion a year before. This does look impressive. But how good are these cash flows in terms of the company's total value?

How cheap is the stock?
This is where I'd want to use a measure called total enterprise value/discounted future cash flows, or TEV/DFCF, to get a picture of the value that investors are getting for their investment dollars. This ratio determines how expensive the company is when compared against future cash flows. For Talisman, it works out to 2.15. For Encana (NYSE: ECA) the value stands at 2.77, while for Denbury Resources (NYSE: DNR) it stands at 2.14. When compared to its peers, Talisman does look cheap -- but that's probably for a very good reason.

More popular valuation ratios reveal Talisman's lousy operational success. Its price-to-earnings ratio of 61.46 makes the stock look far more expensive than Enbridge (NYSE: ENB) at 23.12, Encana at 16.61, and Denbury at 33.89. This doesn't really surprise me, given the downhill trend in recent earnings.

Foolish bottom line
As of now, I'm far from impressed with Talisman. While the future promises to be better, the company has so far failed to scale up on production levels. Until that is addressed, I would want to avoid the stock. Higher natural gas prices will definitely boost earnings in a big way, but it would not be Foolish to depend on macroeconomic conditions alone for a breakthrough.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Denbury Resources. 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.