My enthusiasm for VeraSunEnergy (NYSE:VSE) back in August had begun to look a bit small-f foolish. The stock steadily declined before bottoming out just below $15 in early October. Since then, impressive third-quarter earnings, coupled with higher ethanol prices, have driven shares of VeraSun back to levels it hadn't seen since the summer.

Last month, the company reported its third-quarter earnings that were highlighted by a 159% increase in total revenues and earnings per share (EPS) of $0.40 versus a small loss for the year-ago quarter. VeraSun also reported EPS of $0.76 for the nine months ended Sept. 30, versus a loss of $0.01 for the year-ago period.

The results are attributable to multiple factors. Ethanol shipments rose 92% year over year, as the company enjoyed increased production volume from the opening of its state-of-the-art ethanol plant in Fort Dodge, IA, at the tail end of Q3 2005. Lower corn and natural gas costs, as well as a $0.75-per-gallon price improvement on its ethanol, also contributed to VeraSun's improved earnings.

While the stock is definitely pricier than it was in the beginning of October, the company's earnings are beginning to justify the expense. The stock currently trades at a P/E of 29, versus a P/E of 15 for competitor Archer Daniels Midland (NYSE:ADM). However at its current price, the stock could easily be trading at a P/E in the mid-to-upper teens, should the company continue to attain earnings comparable to its previous two quarters.

The company is in pristine financial condition and has ambitious expansion plans on the horizon. VeraSun has generated $117.4 million in cash from its operating activities for the nine months ended Sept. 30, 2006. Even when subtracting the cash the company raised from its IPO, VeraSun retains a net cash inflow of $99.8 million through its first three quarters of 2006.

At the beginning of the month, the company announced its plans to become the first company to develop a large-scale commercial facility for biodiesel production. Last week, VeraSun also reported the beginning of construction of two new ethanol production facilities that aim to give the company a production capacity of 560 million gallons per year (MMGY) by the end of Q1 2008. The additions will effectively increase present capacity of 230 MMGY by 143%.

While I like the long-term prospects of this stock, there are some risk factors that Fools should take into account, along with additional due diligence, before deciding whether to purchase shares of VeraSun. The company noted in its 10-Q that the spread between ethanol and corn prices can vary significantly, and that it does not expect the spread to remain at its recent high levels. Fools must also consider the stock's volatile history with respect to fluctuating gas prices. Furthermore, substantially all of the company's ethanol is sold to competitor Aventine Renewable Energy Holdings (NASDAQ:AVR), which accordingly accounts for a significant portion of VeraSun's accounts receivable. Aventine is rated significantly below investment grade.

The company has announced its intentions to move away from its present arrangement with Aventine and eventually sell its ethanol directly to end users. However, only time will tell how successful this endeavor will be and whether the stock's recent run-up on the strength of robust earnings is sustainable over the long haul.

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Fool contributor Billy Fisher does not own shares of the companies mentioned.