3. Return on Capital

Buffet explains his take on return on capital as mentioned in one of his famous letters to Berkshire Hathaway's shareholders. He says that it is very important to invest in a varied businesses "that consistently earn above average returns on capital." Sloate explains this principle of Buffet by highlighting a 2011 annual report that Buffet reviews.

Buffet quotes, “Some of the businesses enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25 percent after-tax to more than 100 percent. Others produce good returns in the area of 12 percent - 20 percent.  A few, however, have very poor returns, a result of some serious mistakes I made in my job of capital allocation." So, do remember to give a good look to return on investments provided by companies.