As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. 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 Sirius XM (Nasdaq: SIRI) -- 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 Sirius 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 Sirius'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.

Sirius has had relatively consistent earnings power ... consistently negative. That is, until the past 12 months, when the company began to eke out positive free cash flow.

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 that 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 compare companies with their competitors, even if their industries aren't a perfect match.


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-year average)

Sirius XM Radio




Apple (Nasdaq: AAPL)




Motorola (NYSE: MOT)




Google (Nasdaq: GOOG)




Source: Capital IQ, a division of Standard & Poor's.
*Sirius had negative equity until 2008.

Sirius is substantially leveraged and has historically generated negative returns on equity.

3. Management
Sirius' CEO, Mel Karmazin, has had the job since 2004.

 4. Business
Fans of Sirius will point to the lack of meaningful direct competition in the satellite radio industry, but the field remains vulnerable to technological disruption from indirect competitors.

The Foolish conclusion
Whether or not Buffett would ever invest in Sirius stock (and the answer is an unmistakable "no"), we've learned that while Sirius' CEO has a fairly significant amount of time under his belt, the company doesn't bear the other quintessential characteristics of a Buffett investment: consistent earnings power, high returns on equity with little debt, or an industry not subject to technological disruption.

Fool editor Ilan Moscovitz owns shares of Google and Apple. Google is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor selection. The Fool owns shares of Google. 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.