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 Skechers (NYSE: SKX) -- 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 Skechers 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 Skechers’ 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 five years, Skechers’ earnings have remained more-or-less stable, while free cash flow has fluctuated highly.

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.



Return on Equity (LTM)

Return on Equity (5-year average)





Deckers (Nasdaq: DECK)




Genesco (NYSE: GCO)




Wolverine World Wide (NYSE: WWW)




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

Skechers generates a return on equity that is moderately lower than its peers. It carries very little debt.

3. Management
CEO Robert Greenberg has been at the job since 1993.

4. Business
Shoes aren’t particularly susceptible to technological disruption, but fashion plays a pretty big role.

The Foolish conclusion
Regardless of whether Buffett would ever buy Skechers, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings, limited debt, tenured management, and a straightforward industry. Buffett might watch the company to see if it can generate higher returns on equity.

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Ilan Moscovitz doesn’t own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Skechers. 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.