Note: The original version of this article contained estimates that were inaccurate. They have been updated with the most recent estimates provided by the company. The author apologizes for these inaccuracies.

Late last night, Navarre (NASDAQ:NAVR) made a tough decision. It decided to delay the release of its fourth-quarter and fiscal 2005 earnings. In a press release, the company stated that it sought to account correctly for all of its tax items, and some deferred compensation, correctly. The company quickly noted that these were non-cash charges.

Whenever I read something like this, my first instinct is to look deeper, especially when the stock price falls by almost 10% in a day. There's always something juicy to learn from these situations, and sometimes you might find a bargain or two. After being a Business Week poster child for growth in 2004, Navarre has not had a particularly good 2005. The stock price is down by just over 60% from its 52-week high near $20. Sweet . more fuel for my fire.

As a distributor and producer of multimedia content -- CDs, DVDs from Lions Gate (NYSE:LGF) and others, and computer software from companies like Take 2 Interactive (NASDAQ:TTWO), THQ (NASDAQ:THQI), and Adobe (NASDAQ:ADBE) -- Navarre knows that working-capital management is crucial to its success. The idea is to get the product in and out as efficiently as possible and take a cut of proceeds. See the chart at the end of this Take to see what I dug up.

To understand the growth in working capital vs. the growth in sales, I wanted to make an estimate about where sales might fall at the end of the year. In a nutshell, working-capital requirements have gone up in 2005 and appear to have increased faster than sales.

This is evident in the cash-flow statement, too. As of the third quarter, Navarre had blown through $29 million in operating cash even though earnings had more than tripled to $19.9 million. (Remember that net income sits at the top of cash from operations.) On the balance sheet, there's only $5,000 (yes, thousand) in the bank, and $12 million of additional credit has been used. All of this, coupled with the recent spending on acquisitions, is evidence that Navarre is consuming cash despite the fantastic earnings growth. I think the big reason for the sell-off in 2005 is that shareholders wonder whether these numbers will generate enough returns.

So if you were thinking of using the stock-price drop as a way to pick up some shares on the cheap, I urge you to think twice. Navarre has to prove that it can create cash for its shareholders, not just burn through it. If FY 2005 comes in as planned, then Navarre's cash flow from operations should be positive, but less than net income. Fools should take this situation as yet another reminder of why earnings can be misleading, and why understanding where the cash flow goes is critical to understanding a business's economics.

FY 04 Q1 05 Q2 05 Q3 05 FY 05*
Accounts Receivable $72.3 $71.5 $105.3 $118.0 $96.0 33%
Inventory $30.2 $41.8 $60.0 $62.2 $39 29%
Sales $475.2 $126.7 $146.2 $183.6 $600.0 26%
*Company estimates. Numbers in millions

Looking for companies that are a real value? So is the Motley Fool Inside Valueteam. Check out their latest picks with a free trial subscription.

Fool contributor David Meier does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.