Does the company show a consistently high return on total capital?

Buffet also target firms generating 12 percent or more return on total capital. Exception to this are banks and financial institutions, as they rely on borrowing large amounts of money so there is no chance of the return on total capital to even come close to 12percent. In these instances, he preferably looks at what the bank or financial institutions earned in relation to the total assets under its control (anything above 1percent is good and anything above 1.5percent is great).

Proposed Criteria: 10 year average return on capital must be equal to 12percent. However for banks, and financial companies, a consistent return on assets in excess of 1percent is considered ideal.

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 Does the company need to constantly reinvest in capital?

Buffett likes businesses that seldom need to upgrade its plant and equipment and don’t need any sought of ongoing expensive research and development, whose products shall never go obsolete, are simple to manufacture, where there’s little or no competition in the market, and most importantly, its products should be such that people would never want to see any change.

Proposed Criteria: A company should have a free cash flow, ideally consistent too. 

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