It was easy to miss amid the hubbub of earnings season, but biomedical products maker and Motley Fool Stock Advisor selection Kensey Nash (NASDAQ:KNSY) turned in another fine quarter last week. After reviewing the company's numbers, everything looks basically on track with what we were seeing back in August -- with one caveat.

The company grew its fiscal first-quarter revenues by 22% and its diluted earnings per share by 30%, to $0.26 per share. Product sales jumped 38%, and royalty revenues dropped only 3%, despite a 33% reduction in royalty rates. Free cash flow for the quarter, however, was negative. While Kensey generated cash from operations of $3.9 million, it incurred $4.9 million in capital expenditures. (On the other hand, because $3.1 million of the cap ex was spent to purchase land for a new facility, maintenance cap ex was at most $0.8 million.) While the above numbers represent a sequential slowdown since last quarter, Kensey pointed out that its fiscal first quarter is "traditionally the slowest quarter for medical devices."

With everything going basically as planned, the company reiterated its earnings guidance for 2005. It continues to expect diluted earnings per share to come in at about $1.20, with product sales accounting for a little over two-thirds of revenue, and higher-margin royalty revenues accounting for a bit under one-third.

And now the caveat: Kensey has been buying back an awful lot of shares lately, and the prices it has paid put the wisdom of these purchases in question. During the first quarter, it repurchased 25,000 shares of its stock at an average price of $24 per share. After the quarter closed, it increased its buybacks sevenfold, buying back nearly 175,000 more shares at an average price of $25.73 per share. The question investors need to ask is whether these prices were calculated as being the best means of increasing shareholder returns -- or just to mask the company's past stock dilution (which has averaged about 9% per annum over the past five years).

Focus on the more recent buybacks. At $25.73 per share, Kensey would have an enterprise value-to-free cash-flow ratio of about 18 and a forward P/E of just more than 21. To justify that price, Kensey must maintain a significantly higher earnings growth rate. The 30%+ rates it has posted over the past two quarters qualify. The 25% growth rate Tom Gardner recently posited in Stock Advisor also probably qualifies. But the long-term "conservative" projection of 20% that came with Kensey's initial recommendation back in May 2003 would not.

Long story short, Kensey should heed the same advice we have given DoubleClick (NASDAQ:DCLK) and Symantec (NASDAQ:SYMC) in recent months. It's worse to dilute and then buy back shares than never to have diluted at all.

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Fool contributor Rich Smith owns no shares in any company mentioned in this article.