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 Milwaukee-based Johnson Controls (NYSE: JCI) (go Milwaukee!), he's 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 Johnson Controls 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 Johnson Controls' 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.

With the exception 2008, when revenues plunged because of the recession, Johnson Controls has tended to remain profitable.

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 put them in context:


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity
(5-Year Average)

Johnson Controls 33% 16% 11%
Honeywell (NYSE: HON) 62% 21% 19%
BorgWarner (NYSE: BWA) 51% 17% 9%
Modine Manufacturing (NYSE: MOD) 46% (4%) (5%)

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

Johnson Controls generates a moderate return on equity while employing little debt for its industry.

3. Management
CEO Stephen Roell has been at the job since 2007. Prior to that he served as the company's CFO for well over a decade.

 4. Business
Auto parts, building efficiency, and heating and cooling aren't industries that are particularly susceptible to technological disruption.

The Foolish conclusion
Whether or not Buffett would ever invest in Johnson Controls, we've learned that it exhibits some of the characteristics of a quintessential Buffett investment: fairly consistent earnings, minimal debt, experienced management. Returns on equity are respectable, though Buffett might prefer to see those improve somewhat.

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Ilan Moscovitz doesn't own shares of any company mentioned. BorgWarner is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.