Soon after I posted my most recent write-up on Hidden Gems watchlist stock Goody's (NASDAQ:GDYS), one kind reader wrote in to suggest that I examine a rival of Goody's, fellow clothing retailer TheCato Corp. (NYSE:CTR). After spending a few minutes scanning Cato's recent earnings release, investor relations pages, and its write-ups on Yahoo! (NASDAQ:YHOO) Finance, I agreed: This one looks interesting, even if it does have me a bit baffled.

Market cap
Like Goody's, Cato is a small-cap company, having a market cap of just $440 million.

Enterprise value-to-free cash flow
Thanks to a large hoard of cash, and substantially less debt, Cato sports an enterprise value (EV) of just $355 million. Divide that by its $50 million in free cash flow (FCF), and the company gets an EV/FCF ratio of 7.1 -- quite a discount to my target level of 10 or less.

Historical and projected earnings growth
Historically, the company has been a pretty weak performer, growing earnings just 2.9% annually over the past five years. Moreover, analysts predict just 7.5% average growth over the next five years -- about half of what is expected to be common in the retail industry. Yet, in the company's recent earnings release, it reported 30% growth in earnings per diluted share over the year-ago quarter (on just a 5% gain in revenue and 6% increase in net earnings -- see the explanation in "share concentration"). Like I said before, "interesting."

When looking for hidden gems, I like to see both historical and projected growth rates in excess of a company's EV/FCF ratio. Cato fails the test on historical growth, but passes muster on future growth.

Return on equity
Cato's return on equity, on the other hand, is much more impressive than those growth rates would lead you to expect. Its ROE of 14.3% doesn't mark it as a superb business, the likes of Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY), or eBay (NASDAQ:EBAY). Still, ROE often better measures a company's business quality than do growth rates. To wit, Cato's EV/FCF/ROE ratio is 0.5.

Insider ownership
As promising as the EV/FCF/ROE numbers look from the outside, Cato insiders seem to disagree. Insider ownership of just 6.8% at a small cap like Cato is one red flag, and the trend of recent sales by company insiders is another.

Share concentration
The story just gets stranger as we look for share dilution. While Cato's officers don't like buying the company's shares for themselves, they do like to buy them for the company. Over the past year, Cato has bought back just less than 20% of its shares outstanding. That's certainly one way to boost earnings per share.

Final thoughts
Cato is not a clear-cut, deep-value investment. On the one hand, its growth rates are subpar. On the other, its shares are cheap. On the, er, left foot, the company appears to be shareholder friendly and to manage its capital well -- as indicated by its ROE and the share buybacks. And on the right, company management doesn't seem willing to put its money where its shareholders' mouths are (or something like that). Long story short, I think Cato is an interesting investment idea, but I cannot unqualifiedly recommend it.

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Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.