So here's the good news for Synopsys (NASDAQ:SNPS) shareholders: Yesterday, the board of directors authorized a re-up of its $500 million share-buyback plan. And here's the rest of the good news: According to the press release announcing the revitalized buyback program, the maker of semiconductor-manufacturing software won't be going into debt to pay for its repurchases. Instead, it will fund the buybacks "from available working capital" -- meaning cash on hand, plus the proceeds of cashing checks signed by customers such as Intel (NASDAQ:INTC) and Cypress Semiconductor (NYSE:CY), Sun (NASDAQ:SUNW) and NVIDIA (NASDAQ:NVDA).

But that's the end of the good news.

The bad news
The bad news is that Synopsys greatly overestimates the undervaluation of its shares, if it thinks buybacks are appropriate at today's prices. Not that the company's doing badly -- far from it. No sooner had I penned a Foolish Forecast on the firm's fiscal Q1 2007 earnings last month, than Synopsys produced earnings news that validated my optimism entirely. Revenues increased 15% versus fiscal Q1 2006. Profits per diluted share went from one penny to 16 in the course of a year. Free cash flow nearly tripled to $43.8 million.

No, my objection to renewing the buybacks stems entirely from valuation. Put plainly, I think the stock is overpriced.

Here's why
Over the past 12 months, Synopsys pulled in a cool $189 million in free cash flow. Compared with GAAP profit of $46.4 million, that puts the lie to the stock's apparent trailing P/E of 83, which simply doesn't do justice to the firm's true profit-making prowess.

Unfortunately, even if we value the stock based on its free cash flow, the price just doesn't look compelling. The stock carries a price-to-free cash flow ratio of 20.3 -- not very attractive for a firm expected to grow profits at 12% per year over the next five years.

Prefer to use this year's projections for your valuation? Fine. Management's promise of $275 million in operating cash flow, minus capital expenditures (actually, I subtract both actual capex and capitalized software expenses in computing free cash flow) that usually approximate $50 million or so, puts Synopsys at just about $225 million in free cash flow by year-end. The resulting forward price-to-free cash flow ratio of 17, while cheaper than the figure based on trailing results, still looks like no bargain to this Fool.

Nor am I alone in this view. On Motley Fool CAPS, investors rate Synopsys just a one-star stock and unworthy of your investment dollars. Maybe Synopsys' board should give CAPS a gander before signing any buyback checks.

Fool contributor Rich Smith owns shares of Intel. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked 30th out of more than 25,000 raters. Intel is an Inside Value pick. The Motley Fool has a disclosure policy.