(FORTUNE Magazine) – In early May, Bausch & Lomb CEO Ron Zarrella hit the road to tout his company's turnaround to Wall Street. From a distance, he appears to have plenty to crow about. Shortly after taking the top job at the struggling eye-care company in November 2001, Zarrella, who returned to B&L (BOL, $77) after a seven-year stint at GM, announced a major reorganization and set three-year financial targets for increased sales, margins, and research-and- development spending. Since then, sales and profits have risen sharply, and the stock price has more than doubled. "The turnaround is complete," he declared in a January conference call with investors.

Look closer, though, and things aren't as rosy as they appear. Zarrella, 55, easily met his first target of boosting annual sales at a mid- to high-single-digit rate, to $2.2 billion last year. But he fell short on his other two goals. Operating margins improved to 12.5% of sales at the end of 2004 but fell short of his "mid-teens" target. And spending on research and development remained flat at about 7% of sales, well below his 10% goal. "A turnaround implies a significant change in direction--not a conclusion to the journey," responds Zarrella via e-mail. "We're at an inflection point [and] have to shift our attention to generating higher rates of profitable growth."

Meanwhile, as Scottsdale research firm Gradient Analytics notes in a recent report, the quality of B&L's earnings has deteriorated. Despite rising profits, the company's free cash flow, which it defines as operating cash flow minus capital expenditures and other items, fell by 13% over the past two years, to $167 million in 2004. Declining free cash, of course, increases the chances that a company may have to take on additional debt or issue more shares to fund future growth. B&L's executives have said that the decline resulted from higher capital expenditures, tax payments, and debt reduction. However, they project free cash will drop even further this year, to $150 million. After that it's anyone's guess: Zarrella announced in the January call that he will "no longer comment on free cash, which is a non-GAAP metric." With its shares trading at 25 times trailing earnings, B&L is now selling at a 25% premium to the S&P 500. It's time for investors to focus on a new turnaround story. -- David Stires