Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy PepsiCo (NYSE: PEP), though his large stake in Coca-Cola (NYSE: KO) makes it unlikely, he's left us some clues as to whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno mumbo jumbo businesses.

Does PepsiCo meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine PepsiCo's earnings and free cash flow history:

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

PepsiCo generates fairly reliable free cash flow and earnings.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to put them in context:


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-year average)









Kraft (NYSE: KFT)




Source: Capital IQ, a division of Standard & Poor's.

PepsiCo employs more leverage than its closest competitors, and generates very high returns on equity.

3. Management
PepsiCo's CEO, Indra Nooyi, has been at the job since 2006 and has been with the company for much longer.

4. Business
The soft drink and snack food business isn't one that's particularly susceptible to technological disruption.

The Foolish conclusion
Whether or not Buffett would ever invest in PepsiCo, we've learned that it exhibits many characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with manageable debt, and a CEO with extensive experience with the company.