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 Terra Nitrogen
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Terra Nitrogen 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 Terra Nitrogen's earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Terra Nitrogen's earnings fluctuate somewhat with commodity prices, but the company has remained profitable since 2003.
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)
Source: Capital IQ, a division of Standard & Poor's.
Terra Nitrogen generates an outrageously high return on equity without employing any debt.
Principal Executive Officer Stephen R. Wilson has been at the job since CF Industries
Nitrogen fertilizer production isn't particularly susceptible to wholesale technological disruption, though it can be highly subject to commodity-price movements.
The Foolish conclusion
Whether or not Buffett would buy shares of Terra Nitrogen, we've learned that, although it may not generate the most consistent earnings, it does exhibit some of the characteristics of a quintessential Buffett investment: high returns on equity with limited debt, tenured management, and a straightforward business.
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Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter at @TMFDada. 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.