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 Consolidated Edison (NYSE: ED) -- he hasn't specifically mentioned anything about it to me -- we can discover 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, proven management, and a reasonable valuation, he demands:

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

Does Consolidated Edison 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 Consolidated Edison's earnings history:

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

Consolidated Edison is showing growing profits. That's a good sign.

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 among peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-year average)

Consolidated Edison 108% 9% 10%
Exelon (NYSE: EXC) 92% 20% 19%
Duke Energy (NYSE: DUK) 83% 6% 6%
Dominion Resources (NYSE: D) 142% 22% 18%

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

Consolidated Edison exhibits lower returns on equity than its peers. Its debt burden seems in-line with theirs.

3. Business
While no industry is completely immune to the vicissitudes of time, Multi-Utilities isn't the most prone to technological disruption – we're not talking astro-nanorobotics here.

The Foolish conclusion
Regardless of whether Buffett would ever buy Consolidated Edison, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings power, moderate debt levels, and a simple business. However, Buffett would probably prefer to see higher returns on equity.

Interested in any of these companies? Add them the My Watchlist:

Ilan Moscovitz doesn't own shares of any company mentioned. Exelon is a Motley Fool Inside Value recommendation. Dominion Resources is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended writing covered calls on Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.