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 Kinetic Concepts (NYSE: KCI) -- 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 Kinetic Concepts 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 Kinetic Concepts' 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.

Over the past five years, Kinetic Concepts has generated fairly stable earnings.

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.

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)

Kinetic Concepts 71% 19% 36%
Stryker (NYSE: SYK) 14% 18% 20%
Zimmer (NYSE: ZMH) 19% 10% 14%
CR Bard (NYSE: BCR) 48% 26% 23%

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

Kinetic Concepts produces fairly high high returns on equity with a moderately high debt load.

3. Management
CEO Catherine Burzik has been at the job since 2006. Before that, she worked in health-imaging devices for Kodak, as well as for Johnson & Johnson for a number of years.

4. Business
Medical technology can change fairly rapidly, particularly in pharmaceuticals, and the ultimate arrival of generics is a looming threat, though Kinetic's devices have a leg up and long patent lives remaining. Buffett owns shares of fellow device-maker Johnson & Johnson.

The Foolish conclusion
Regardless of whether Buffett would ever buy Kinetic Concepts, we've learned that it exhibits some of the quintessential characteristics of a Buffett investment: consistent earnings and high returns on equity, albeit with moderate debt.

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Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter at @TMFDada. The Motley Fool owns shares of Kinetic Concepts, Johnson & Johnson, and Zimmer Holdings. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Stryker and creating a diagonal call position in Johnson & Johnson. 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.