1. Does company show a consistently high return on Return On Equity?
• Companies that benefit from durable competitive advantage have high ROE, >12%
• Price competitive commodity type businesses have low ROE, <12%
• Consistency is everything
2. Does company show consistently high return on Return On Total Capital?
• Consistent ROTC
• Won’t work for companies in price competitive business
• Look for ROTC >12%
• With banks, investment banks, financial companies, look for consistent ROA >1% and consistent ROE >12%
3. Does earnings show strong upward trend?
• Historical EPS that strong, show upward trend, indicate durable competitive advantage
• Historical EPS wildly erratic indicate price competitive business
4. Is company conservatively financed?
• Companies with durable competitive advantage typically have long term debt burdens of fewer than 5x current net earnings
5. Does company have brand name product or service that gives it competitive advantage in market place?
Yes = good, can enjoy consistent financial performance over the years
6. Does company rely on organized labor force?
No=good, cannot bid up wage prices and cause strikes
7. Can company increase prices along with inflation?
Yes=good, indicates strong brand name, customers willing to buy product even as prices increase
8. How does company allocate retained earnings?
Good=re-investment for expansion, buy back shares
Tenuous=research and development (results not guaranteed)
9. Does company repurchase shares?
Yes=good, increase earnings per share
10. Are company’s share price and book value on the rise?
Yes=good, market recognizes book value increase, reflected in share price
Source: The New Buffettology (2002)
by Mary Buffett (Buffett's ex daughter in law) and David Clark
http://www.amazon.com/New-Buffettology-Techniques-Investing-Successfully/dp/0684871742
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