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 U.S. Steel (NYSE: X) -- 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 tell us 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 and a reasonable valuation, he demands:

1. Consistent earnings power.

2. Good returns on equity with limited or no debt.

3. Quality of management.

4. Simple, non-techno-mumbo-jumbo businesses.

Does U.S. Steel 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 U.S. Steel'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. LTM = Last 12 months.

Earnings and free cash flow have fallen off a cliff recently, partially as a result of rising input commodity prices and weak demand for steel.

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.


Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity
(5-Year Average)

U.S. Steel




Nucor (Nasdaq: NUE)




Steel Dynamics (Nasdaq: STLD)




Allegheny Technologies (NYSE: ATI)




Median Steel*




Source: Capital IQ, a division of Standard & Poor's. *Of mid- and large-cap domestic.

U.S. Steel exhibits a lower than average return on equity while employing higher than average debt -- not exactly signs of a strong competitive advantage.

3. Management
U.S. Steel's CEO, John Surma, has been at the job since 2004 and had worked at the company for a few years before then. Before that, he worked in the oil industry and in finance.

4. Business
One doesn't usually associate the steel industry with rapidly evolving technology. It's worth noting, however, that in recent decades, integrated mills like U.S. Steel's have had increasing difficulty keeping up with the minimills used by competitors.

The Foolish conclusion
Regardless of whether U.S. Steel is a good buy, we've learned that it probably doesn't display the quintessential signs of a Buffett investment, such as earnings stability and signs of a competitive advantage. Despite entering the steel industry rather late in his career, U.S. Steel's CEO has a slightly longer tenure than most.

Ilan Moscovitz doesn't own shares of any company mentioned. Nucor is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.