CF data by YCharts. CF stock is crumbling, and there's a reason for that.

In one respect, CF Industries' (NYSE:CF) Q3 earnings report this week wasn't all that bad. But in a more important respect, it was bad. Very bad -- and the stock is down 11% because of it.

What went wrong
Reporting earnings Wednesday evening, the fertilizer maker announced that it had taken in $927 million in revenues in its fiscal third quarter. That was a bit better than the $924 million  that analysts had told investors to expect. So far, so good. Problem was, the gross margins that CF earned on those revenues fell off a very steep cliff.

One year ago, in Q3 2014, CF was earning gross profits of nearly $0.33 per dollar of revenue booked. Last quarter, that gross profit margin dropped by 1,490 basis points, to just 17.8% -- less than $0.18 in gross profit per revenue dollar. As a result, despite growing revenues modestly year over year, the evaporation of profits earned on those revenues left CF earning just $0.39 per diluted share in the third quarter -- 25% less profit than a year ago. Even netting out "one-time" charges to earnings that are not expected to recur, the company's pro forma profit would have been only $0.49 -- three cents less than last year, and fully $0.25 short of analyst estimates.

So you see why investors were upset. The question is whether they're upset enough.

What else went wrong
In addition to the plunging profits, CF Industries reported arguably even worse news where it counts even more. Free cash flow for the third quarter, where the company barely broke even a year ago ($34 million, versus $141 million in GAAP "net income"), plunged deeply into the red in Q3 2015. Not only did operating cash flow decline (to $573 million), but capital spending surged 29%.

That was a much greater increase than CF's revenue growth for the quarter, and it left CF with a $186 million free cash flow deficit for the quarter. Worse, year to date, negative free cash flow levels have now swelled to truly mammoth proportions, with CF burning through $720 million over the past nine months.

What else could possibly go wrong?
And yet, heedless of the damage already done, CF seems determined to plunge ahead and expand capacity further, despite evaporating profit margins and weak sales growth. The company admits that "the global nitrogen market continued to be supply driven, with significant availability of internationally sourced product and lower global demand pressuring prices." So long as things remain this way, pricing power will be poor.

The logical reaction to such a situation would be to cut production, reduce supply, and support prices. But instead, CF has a new urea plant in Donaldsonville, La., set to open, is refurbishing its Woodward, Okla., nitrogen facility, and is expanding production capacity generally -- and at a capital investment cost now forecast to exceed $4.6 billion ($2.6 billion of which will be spent this year).

CEO Tony Will insists that these moves, combined with mergers and acquisitions, and global partnerships with other companies, "will solidify CF's position as the world's leading nitrogen producer with an unmatched tangible growth profile." But there's also the nagging issue of figuring out a way to earn some cash money in the process.

Lately, CF doesn't seem to have much of a handle on that.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on our virtual stockpicking service, Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 299 out of more than 75,000 rated members.

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