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.

We can't know for sure whether Buffett is about to buy Cisco (Nasdaq: CSCO) -- -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal 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 Cisco 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 Cisco'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.

Despite the economic downturn, Cisco has managed to produce fairly consistent earnings as free cash flow over the past five years.

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)

Cisco 35% 16% 22%
Juniper Networks (Nasdaq: JNPR) 14% 9% 2%
F5 Networks (Nasdaq: FFIV) 0% 21% 12%
Brocade Communications (Nasdaq: BRCD) 38% 5% 7%

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

Cisco produces fairly high returns on equity while employing moderately low levels of debt.

3. Management
CEO John Chambers has been at the job since 1995. He’s also worked for other large tech companies, including IBM, and served the Bush and Clinton administrations infrastructure and trade committees.

4. Business
While Buffett might be a bit hesitant to invest in a tech-focused company such as Cisco, Internet routers aren't particularly susceptible to disruption so far as IT goes.

The Foolish conclusion
Whether or not Buffett would buy shares of Cisco, we've learned that the company exhibits several of the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a more-or-less straightforward business.

If you'd like to stay up to speed on the top news and analysis on Cisco or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter at @TMFDada. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and shorting Juniper Networks. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.