A TYPICAL CIGARETTE,

you've probably heard, has tiny ventilation holes in the paper that surrounds its filter one ring for a regular cigarette, and two or more for a light one. So, when smokers hold their cigarettes, covering the holes, they receive larger doses of nicotine than did the testing machines whose results are printed on the packs.

That raises plenty of ethics questions, but also one engineering one: How do they get all those tiny perforations for lack of a better term we'll call them wheeze holes on the things to begin with? Answer: PerfoLas, a carbon-dioxide laser with an optical multiplexer that can cut round or oval wheeze holes in four rolls of paper simultaneously more than half a million wheeze holes per second in total.

Today we'll look at the company that makes PerfoLas, along with heaps of other laser devices for cutting everything from diamonds to body parts: Plymouth, Mich.-based Rofin-Sinar Technologies. Profits that are growing more quickly than capital expenditures earned the company a spot recently on our free cash flow screen.

Free cash flow is the money a company has left over after paying its bills and making necessary investments in plants and equipment. To calculate it, start with net income and add depreciation and amortization back in, then adjust for any change in working capital (current assets less current liabilities), and subtract capital expenditures. What's left is the money a company has available at the end of each quarter to pay dividends, buy back shares or fund further growth initiatives.

Young growth companies produce little, or even negative, free cash flow, which is fine. They often have to spend more than they make initially to build their operations. So don't bother using a free cash flow screen to dig up those kinds of companies. Rather, you should use the price/free-cash-flow ratio to find mature companies whose share prices might not fully reflect the dollars they're pocketing each quarter. Shares of these companies may be due for a lift.

Our stock screener, combined with the recipe to the right, can help you find just such companies. Recently our free cash flow search produced a list of 19 of them, including Rofin-Sinar.

"Macro" and "micro" are the two terms Rofin-Sinar uses to separate its laser (an acronym for light amplification by stimulated emission of radiation, if it ever comes up on Final Jeopardy) segments. The difference between them won't be difficult to remember. The macro unit, which brought in about 52% of the company's trailing 12-month sales of $303 million, makes lasers for cutting big things, like sheet metal for cars. The micro unit, which brought in the rest of sales and includes cutting and laser-marking products, makes lasers for small things (cigarettes) and really small things (transistors).

Rofin-Sinar's main competitors include Coherent, with trailing 12-month sales of $463 million, Excel Technology, with $130 million, and GSI Lumonics, with $259 million. Its operational headquarters is in Hamburg, Germany.

Sales growth for the company has been accelerating from a dismal 0.6% in fiscal 2002 (ended Sept. 30 of that year) to 16.1% last year, to the 19.9% analysts project for this year. Much of that growth has come from acquisitions, such as that of Swedish fiber-optics concern Optoskand AB Gothenburg in February for an undisclosed amount. Such purchases have been funded only partly with free cash; Rofin-Sinar also completed a secondary stock offering of 2.5 million shares for $25 a piece in March. But analysts say the company has a history of shopping wisely for takeover candidates, an assertion that's backed up by the stock's 350% climb over the past three years.

Rofin-Sinar announced two new purchases on Sept. 1: PRC Laser, based in Landing, N.J., and Lee Laser in Orlando, Fla. Again, amounts weren't disclosed, but analysts put the companies' combined yearly sales at $30 million, and figure the combined purchase price may be in the $30 million to $35 million range. Management has said the new companies have operating margins similar to its own. It shouldn't be too difficult, in any event, to improve the 1.9% return the company was generating on its $123 million cash stockpile as of Sept. 30.

Fiscal third-quarter results for Rofin-Sinar, reported on Aug. 11, showed sales increasing 27% year-over-year to $82.1 million and profits jumping 103% to $7.4 million. Per-share profits of 48 cents stomped analysts' estimates by a dime. Even with the increased share count, per-share profits climbed 60%. Operating margin during the quarter improved to 15.2% from 9.0%. Management credited the strong results to "particular success in the North American and Asian markets, where the automotive and the semiconductor and electronics industries, respectively, have delivered exceptional growth."

Dirk Schlamp, a securities analyst with DZ Bank, Germany's sixth-largest bank, considered the quarter telling of the company's competitive strength. "Third-quarter business trends convincingly show that Rofin-Sinar is less affected by pressure on margins than some of its competitors," wrote Schlamp in an Aug. 13 research note. "We attribute this among other things to the fact that the systems it offers are good value for money and that its major selling markets reveal little price sensitivity." (Schlamp doesn't own shares of Rofin-Sinar; DZ Bank has an investment-banking relationship with the company.)

Speaking of price sensitivity, how do Rofin-Sinar's shares look compared with the company's profit prospects? They trade at about 19 times trailing 12-month free cash flow; the average P/FCF ratio for makers of scientific and technical equipment is around 38. And on a price/earnings basis, the stock compares just as favorably, at 16 times forward earnings, lower than the group's P/E of 29. Analysts project that the company will boost its earnings by 20% annually over the next five years, which gives its shares a price/earnings-to-growth ratio of 0.80, again, less than peers' 1.82. Those numbers suggest that shares of this laser-tool maker look poised to continue their red-hot growth.