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.

It's unlikely Buffett would ever buy shares of a company as small as lululemon athletica (Nasdaq: LULU) purely because of the size of his portfolio. 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 this series, we do just that.

Writing in a 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 lululemon 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 lululemon's earnings and free cash flow history:

Source: S&P Capital IQ.

Over the past five years, lululemon has grown its earnings significantly. (The drop in free cash flow over the past 12 months was due to heavy capital expenditures.)

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 is.


Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

lululemon athletica 0% 39% 33%
Under Armour 18% 17% 17%
Nike 5% 23% 22%
bebe stores 0% 2% 7%

Source: S&P Capital IQ.

lululemon generates insanely high return on equity without employing any debt.

3. Management
Christine Day has been CEO since 2008. Before that, she had managerial experience at Starbucks and Select Comfort. Dennis Wilson has been chairman since he founded the company in 1998.

4. Business
Clothing is not particularly susceptible to technological disruption, but the yoga boom is likely too recent a development for Buffett to feel comfortable investing in it.

The Foolish conclusion
So is lululemon a Buffett stock? Probably not, since Buffett wouldn't feel comfortable forecasting the staying power of yoga's popularity. Interestingly, however, the company does exhibit several of the other characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity with limited or no debt, and tenured management. To stay up to speed on lululemon's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.