If you've been digging for stocks, chisel in hand, you might have come across Fossil (NASDAQ:FOSL) and its valuable stock -- up 540% over the past five years. Within the last couple of trading days, though, its shares have dropped 15% off its high, leading many to wonder whether this is still a prized Fossil or a worthless rock.

While it's uncertain what's carboniferous or cretaceous about Fossil, there's plenty of meat in its third-quarter results to satisfy a carnivorous investor's appetite. The company's worldwide revenues increased 22.5% or $236 million, forming a rock-solid net income of $23.4 million -- a 39% increase over the same period a year ago. The board of directors liked the sound of these results enough to authorize a stock-repurchase plan to buy back up to 500,000 shares.

So what's got investors running like there is a Tyrannosaurus Rex on the chase? From its quarterly results, there does appear to be some tar pits of danger worth noting. While U.S. sales are up 22.4% year over year, Fossil brand watch sales are down 10.9% in the same time period. As a result, rising inventories have become particularly worrisome. Fossil's current inventory of $208.1 million has shot up 49.5%, compared with the $139.2 million count a year ago.

For 2004, the company is expecting to report $1.25 in earnings per share (EPS), giving it a current-year, price-to-earnings (P/E) ratio of 21.8. On the surface its valuation appears normal, but underneath it gets downright volcanic. With a market capitalization of $1.9 billion, no long-term debt, and $103.6 million in cash, the company has an enterprise value (EV) of $1.8 billion. The company's latest cash flow statement hasn't been released, but working off of Fossil's second-quarter cash flows, it has a run rate of structural free cash flow (SFCF) of $41.1 million. If T-Rex doesn't scare you, its EV/SFCF of 44 will.

For many makers of accessories and apparel (that would be Fossil; it's not just into watches), 2004 has been a trying year. And, for Fossil, with insiders selling and the company buying, the picture doesn't appear much clearer. While it isn't a worthless rock, patience may be the best way to get a better deal for this prized Fossil.

Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.