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 Nordic American Tanker (NYSE: NAT) -- he hasn't specifically mentioned anything about it to me -- we can discover 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, proven management, 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 Nordic American 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 Nordic American'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.

Over the past few years, Nordic American's earnings have fluctuated pretty substantially with the volatile global economy.

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

Return on Equity

Return on Equity
(5-year average)

Nordic American Tanker




Frontline (NYSE: FRO)




General Maritime (NYSE: GMR)




Teekay Tankers (NYSE: TK)




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

Nordic American produces modest, though superior returns on equity to its peers (with the exception of Frontline). Unlike much of the heavily leveraged industry, it carries very little debt.

3. Management
CEO Herbjorn Hansson has been at the job since 1995.

4. Business
Crude oil shipping may be subject to macro conditions, but it isn't particularly prone to technical disruption -- we're not talking astro-bionanorobotics here.

The Foolish conclusion
Regardless of whether Buffett would ever buy Nordic American, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: low debt levels, established management, and a technologically straightforward industry. On the other hand, the earnings have been somewhat volatile and returns on equity are probably a bit lower than Buffett would like to see.

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