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.

Yes, Buffett invested in Harley-Davidson (NYSE: HOG) unsecured debt back in early 2009. But that debt pays 15% interest and isn't an equity stake.

While we can't know for sure whether Buffett is about to buy Harley stock -- 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 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 Harley 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 Harley'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.

Harley's earnings haven't been horribly consistent though this tough economy, though this was a departure from Harley's unmistakable growth trend dating back through the early 1990s.

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 use an industry context. Harley is really the only large American motorcycle manufacturer, so let's use the wider auto industry:


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-year average)





Ford (NYSE: F)




Toyota (NYSE: TM)




Honda (NYSE: HMC)




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

It's been a rough time for the auto industry -- only Honda seems to be currently earning a respectable return on equity, and Ford actually has negative equity. Historically, however, Harley's 27% average return is quite enviable. Some of that is a result of the company's high debt load, though not as much as you might think, as much of that debt-to-equity expansion occurred only in the years after Harley's higher return-on-equity years.

3. Management
Harley's CEO, Keith Wandell, has only been at the job since 2009. Previously, he'd worked at Johnson Controls.

4. Business
Motorcycle production isn't an industry that's generally subject to rapid technological disruption.

The Foolish conclusion
Whether or not Buffett would ever invest in Harley stock, we've learned that historically it's produced consistent earnings and high returns on equity with little debt. In recent years, however, Harley has had to take on a larger debt load and earnings have fallen back. Buffett might also prefer to see a longer track record for Harley's new CEO.