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 Sprint Nextel (NYSE: S) -- he hasn't specifically mentioned anything about it to me -- he has left us some clues as to whether it's the sort of stock that might interest him. Answering that question could also tell whether it's a stock that should interest us.

In his most recent 10-K filed with the SEC, 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. Quality management.
  4. Simple, non-techno mumbo-jumbo businesses.

Does Sprint 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 Sprint's recent 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. LTM = last 12 months.

Sprint generates fairly steady free cash flow, but its reported earnings have been negative for years. That's not always cause for alarm -- in Sprint's case, the disparity is largely because capital spending trails depreciation expenses. That can indicate that Sprint's network is years ahead of where it needs to be or that the company hasn't invested enough in its network. In Sprint's case, the latter seems more likely.

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.

Because 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:

Company

Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-Year Average)

Sprint

123%

(18%)

(20%)

Verizon (NYSE: VZ)

146%

2%

12%

AT&T (NYSE: T)

68%

13%

11%

Comcast (Nasdaq: CMCSA)

72%

9%

6%

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

Sprint's return on equity is negative, again, owing to its negative reported earnings.

3. Management
Sprint's CEO, Dan Hesse, has only been at the job since the end of 2007. However, he has been working in the industry for many years.

4. Business
The wireless telecom industry isn't one that's subject to technological disruption every couple of years, but it is one that requires continual reinvestment, and there are signs (low capital spending) that Sprint may be lagging its peers in this respect.

The Foolish conclusion
Sprint doesn't exhibit many characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and a long-tenured CEO, though Hesse's prior experience is a plus.

Ilan Moscovitz doesn't own shares of any company mentioned. Sprint Nextel is a Motley Fool Inside Value recommendation. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.