Just seven trading days after Italian motorcycle maker Ducati Motor Holding (NYSE:DMH) reported its year-end financial results, shares -- and shareholders -- are riding high.

They're 12.5% higher, to be precise, when compared with the price of shares the day before earnings came out. What's got investors so hot on Ducati these days? Let's find out.

As you'll recall from our pre-earnings Foolish Forecast, U.S. investors got little help from Wall Street in guesstimating what kind of numbers Ducati might have put out. About the only information we had was from a single analyst predicting breakeven earnings for the year. Fortunately, Ducati itself helped us out, kindly providing a preliminary earnings report in February, in which it posited full-year sales of $405.6 million (a slight decline year over year), and an $11.3 million loss. On March 22, Ducati confirmed both of those numbers in its official earnings release, filed with the SEC as a Form 6-K.

Despite the company continuing to lose money from a GAAP perspective, CEO Federico Minoli pronounced himself "extremely satisfied with the results." He again highlighted "the decrease of dealer inventory" as a key accomplishment, noting that with older goods moved out of the stores, the prospects were for "a significant number of orders" of new, higher-margin products such as Ducati's new Superbike 1098, Hypermotard, and Desmosedici.

The numbers back up both assessments. Gross margins have rebounded, rising from 15.3% in 2005 to 23.9% in 2006. Inventories are down 14% against just a 1% decline in sales, showing real progress in clearing out old products. Accounts receivable are down similarly at 13.3%.

Collecting its bills efficiently, and converting old inventory to cash, Ducati generated significantly higher free cash flow in 2006 than its GAAP net loss might lead you to expect. Even as it lost $11.3 million for the year, free cash flow amounted to $34.6 million. Although that's down from 2005's $41.3 million in free cash flow, it still leaves the firm with a price-to-free cash flow ratio of 16.4 even after the shares' run-up. For comparison, that's roughly half the valuation commanded by fellow biped Harley-Davidson (NYSE:HOG) in the U.S.

That said, even if it seems cheap relative to the competition, without a firm grasp on how fast Ducati can grow in the long term, I'd hesitate to call the firm a bargain despite its seeming relative cheapness. Let's see if the firm can get its free cash flow moving in the right direction first.

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.