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 NVIDIA (Nasdaq: NVDA) -- 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 NVIDIA 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 NVIDIA'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. LTM = last 12 months.

NVIDIA has had pretty wild fluctuations in its earnings and free cash flow over the past few years. Of course, this is to be expected for a semiconductor company during a global recession.

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 use an industry context:


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-year average)





Advanced Micro Devices (NYSE: AMD)




Intel (Nasdaq: INTC)




Broadcom (Nasdaq: BRCM)




Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months.

NVIDIA has a higher-than-average historical return on equity, which has taken a fall in recent years. It employs almost no debt.

3. Management
NVIDIA's co-founders started the company in 1993 and continue to lead it.

4. Business
Graphics technology and semiconductors are fields that are highly vulnerable to competing technological innovation.

The Foolish conclusion
Whether or not Buffett would ever invest in NVIDIA, we've learned that the exhibits higher than average historical returns on equity and has been run by its long-tenured co-founders. However, the company doesn't bear at least two of the quintessential characteristics of a Buffett investment: protection from technological innovation and possibly consistency in earnings power.

Fool editor Ilan Moscovitz doesn't own shares of any company mentioned. Intel is a Motley Fool Inside Value recommendation. NVIDIA is a Motley Fool Stock Advisor selection. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletter services free for 30 days. 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.