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 Titanium Metals (NYSE: TIE) -- 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 Titanium Metals 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 Titanium Metals' 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.

Titanium Metals' earnings haven't been very consistent, though its free cash flow has been more so as inventories have fallen over the past year or so.

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:


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-year average)

Titanium Metals




Allegany Technologies (NYSE: ATI)




Carpenter Technology (NYSE: CRS)




RTI International (NYSE: RTI)




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

Though earnings have been subdued over the past 12 months, Titanium Metals has strong historical returns on equity and employs no debt.

3. Management
Titanium Metals' CEO, Bobby O'Brien, has only been at the job since the end of 2009, though he worked at the company for more than a decade prior to landing that gig.

 4. Business
The titanium industry isn't generally subject to rapid technological disruption.

The Foolish conclusion
Whether or not Buffett would ever invest in Titanium Metals, we've learned that it produces high returns on equity without debt. However, earnings fluctuate considerably based on economic conditions and demand from a few large purchasers. Buffett might also prefer to see a longer-tenured CEO, though O'Brian's past experience with the company is certainly a plus.

Fool editor Ilan Moscovitz doesn't own shares of any company mentioned. Titanium Metals is a Motley Fool Stock Advisor selection. 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.