Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to track his investments and glean what they can from his thinking processes. While we can't know for sure whether Buffett is about to buy Xerox (NYSE: XRX) -- 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 Xerox 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 Xerox's earnings and free cash flow history:

Xrx

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Over the past five years, Xerox's earnings have been a bit volatile, while its free cash flow has grown considerably.

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.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity (5-year average)

Xerox

71%

8%

10%

IBM (NYSE: IBM)

133%

67%

53%

Hewlett-Packard (NYSE: HPQ)

55%

22%

20%

Cisco (Nasdaq: CSCO)

35%

16%

22%

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

Xerox hasn't produced terribly high returns on equity. It employs moderate debt.

3. Management
CEO Ursula Burns has only been at the job since 2009, though she's held other senior positions at the company for years.

4. Business
The office electronics industry isn't completely susceptible to wholesale technological disruption, though Buffett might still be somewhat reluctant to invest in it.

The Foolish conclusion
Regardless of whether Buffett would ever buy Xerox, we've learned that while the company has grown its free cash flow over the past few years, it doesn't particularly exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt.

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Ilan Moscovitz doesn’t own shares of any companies mentioned. You can follow him on Twitter@TMFDada. The Motley Fool owns shares of International Business Machines. The Fool has created a bull call spread position buy on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems. 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.