I'm always annoyed when good top-line growth doesn't drip down to a company's bottom line. When sales are growing much faster than earnings, then something is often going wrong at a company, or management is not focusing on operations as closely as it could be.

This seems to be the case for health-care products supplier PolyMedica (NASDAQ:PLMD). Revenues were up 41% to $164 million due to some smart acquisitions in the company's key area of focus, diabetes care. The company also enjoyed 125% sales growth, to $47 million, in its Liberty Part D drug benefit program. Nonetheless, gross margins were very weak, falling eight percentage points year over year.

PolyMedica broke out its SG&A expenses as a percentage of revenues, and tried to put a positive spin on things by showing that they declined to only 37% of revenues from the 40% they were a year ago, but that's irrelevant if gross margins are falling at a faster rate. Thus, income from operations actually fell this quarter, to $16 million, and operating margins dropped to a paltry 9.6% from the 14% they were a year ago.

Other than its earnings announcement, it was a pretty uneventful quarter for PolyMedica. It did issue $180 million in convertible debt to pay off existing floating-rate debt and also buy back shares. The buyback seems sort of strange to me; what's the point of doing something that will dilute shareholders in the future, and then using that money to buy back shares today? Especially considering that PolyMedica also did a $150 million share buyback last year?

The probable reason for the $30 million that PolyMedica will be using for the share buybacks is that management is trying to reverse the dilution, and the hit to its earnings per share, that will be coming from its excessive $6 million in options expenses for the first six months of this year.

It's hard to get excited over this company when its options expenses are nearly half its earnings, margins are declining across the board, and it will now face massive dilution in several years via those aforementioned converts. PolyMedica may be producing solid top-line growth by focusing on smart acquisitions, but it's the other areas of the company that need more attention if the company wants to get my investing blood sugar going.

PolyMedica is a former Motley Fool Hidden Gems selection. To see which stocks Tom Gardner and his team have picked as today's best small caps, take a 30-day free trial of the service.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.