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 Western Refining (NYSE: WNR) -- 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 Western Refining 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 Western Refining'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.

Western Refining has experienced quite a bit of earnings volatility, particularly in 2009 after fuel prices fell.

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)

Western Refining 152% 4% 11%
Valero Energy (NYSE: VLO) 51% 0% 11%
HollyFrontier (NYSE: HFC) 62% 20% 30%
Sunoco (NYSE: SUN) 67% 11% 21%

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

Western Refining has generally produced low to moderate returns generates high returns on equity over the past five years. It employs a bit more debt than its peers.

3. Management
CEO Jeff Stevens has been at the job since 2010. He was one of Western Refining’s original founders, and has held several roles at the company since 2002. He replaced Paul Foster, who will remain the company’s chairman.

4. Business
The refining business isn't particularly susceptible to wholesale technological disruption, though, as we've seen, price volatility can make it extremely cyclical for pure-play refiners like Western.

The Foolish conclusion
Whether or not Buffett would buy shares of Western Refining, we've learned that, although it has tenured management and operates in a more-or-less straightforward industry, it doesn't particularly exhibit some of the quintessential characteristics of a Buffett investment: consistent earnings and high returns on equity with limited debt.

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A previous version of this article mistakenly referred to Western Refining’s chairman, Paul Foster, as CEO. It has been corrected. The Fool regrets the error.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter at @TMFDada. The Motley Fool owns shares of Western Refining. 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.