Warren Buffett has never published a formal investment checklist. But across six decades of Berkshire Hathaway shareholder letters, interviews, and public speeches, he has described the qualities he looks for in extraordinary consistency. When you synthesise his documented criteria, six quantifiable principles emerge.
These are the six criteria Buffett Radar applies to every S&P 500 company every market day. Understanding what each measures — and why — is the foundation for interpreting any stock's score.
Criterion 1 of 6
Buffett has consistently said he prefers businesses with a long operating history. His logic is straightforward: a company that has survived multiple economic cycles, interest rate environments, and industry shifts has demonstrated something real about its durability. It is not just a concept or a bet on future potential — it is a proven, functioning entity.
This eliminates IPOs, SPACs, and newly public companies regardless of how exciting their prospects appear. Buffett has famously avoided nearly every technology IPO, not because he dislikes technology, but because newly public companies have no track record against which to measure their financial claims.
"If I had to pick one company that I would expect to be doing business in 10 years, I would not pick a start-up. I'd pick something with a long record of earning money." — Warren Buffett
Companies that have only performed well during a particular bull market, companies that are still pre-revenue or recently profitable, and businesses whose financial history is too short to establish a meaningful pattern of margins, returns, or cash generation.
Criterion 2 of 6
Consistent profit margins are one of the clearest signals that a business has a competitive advantage — what Buffett calls a "moat." Any company can be profitable in a good year. But maintaining margins through recessions, input cost inflation, and competitive pressure requires structural pricing power.
A business with a wide moat can raise prices without losing customers (think Coca-Cola's brand loyalty, or a toll bridge). A business without one is constantly fighting margin compression as competitors undercut on price. Buffett has said that the first thing he looks for in a business is what prevents its competitors from taking market share — and sustained margins are the quantitative fingerprint of that answer.
Companies that score well here typically have stable or expanding gross margins across 4-5 years of data, combined with revenue growth. Margin compression paired with revenue growth is a warning sign that pricing power is deteriorating. Margin expansion without revenue growth may indicate cost-cutting rather than genuine competitive strength.
Criterion 3 of 6
Buffett is famously conservative about leverage. He has described debt as a four-letter word and has avoided it both personally and in his business acquisitions wherever possible. His reasoning is that debt introduces fragility — a highly leveraged business can be forced into distress even when its underlying operations are sound, simply because it cannot service its obligations during a downturn.
A company with a D/E ratio below 0.5 has financed the majority of its assets with equity rather than borrowed money. This means its balance sheet can absorb shocks — a falling revenue quarter, a spike in interest rates, an unexpected capital expenditure — without threatening its solvency.
Leverage artificially inflates returns on equity. A company that earns 10% on assets but is 80% debt-financed will show a much higher ROE than a debt-free competitor with the same operating performance. When evaluating ROE (criterion 4), debt context is essential. Buffett specifically looks for high ROE achieved with low leverage — that combination reveals genuine operational excellence rather than financial engineering.
Criterion 4 of 6
Return on equity — net income divided by shareholders' equity — measures how efficiently a company converts the capital shareholders have invested into profit. Buffett has called it "the single best measure of management quality" and has consistently screened for sustained ROE above 15%.
A company generating 20% ROE is compounding shareholder capital at twice the rate of one generating 10% ROE, all else equal. Over a decade, this difference is enormous in its effect on intrinsic value.
"The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return." — Warren Buffett, 1992 Shareholder Letter
A single high-ROE year means little. What matters is whether ROE is consistently high across multiple years, indicating that the company's competitive position — not a one-off event — is responsible. A company that earns 25% ROE in one year and 8% the next has revealed that its returns depend on luck or cyclicality, not structural advantage.
Criterion 5 of 6
Even the best business is a bad investment if you pay too much for it. Buffett's valuation criterion addresses this by checking whether a company's current price-to-earnings ratio is below its own historical average and below its industry peer group. Both conditions matter: the first tells you whether the stock is cheap relative to its own history; the second tells you whether it is cheap relative to comparable businesses.
A company trading at P/E 12× when its 5-year average is 20× and the sector average is 18× is attractively valued by this measure. A company trading at P/E 30× when its own history is 15× and peers average 22× is expensive regardless of how good the business is.
P/E is a quick filter, not a definitive value estimate. The more rigorous calculation — which Buffett uses — is the discounted cash flow model that produces an intrinsic value estimate. The P/E criterion in the scoring system catches obvious overvaluation. The DCF model, described in our intrinsic value guide, provides the full picture.
Criterion 6 of 6
Free cash flow — operating cash flow minus capital expenditures — is what Buffett calls "owner earnings." It represents the cash a business actually generates for its shareholders after maintaining and growing its asset base. Buffett strongly prefers FCF to reported earnings because earnings can be manipulated through accounting choices, while cash flow is much harder to fake.
A company with strong FCF has options: it can pay dividends, buy back shares, pay down debt, or reinvest at high rates of return. A company with low or negative FCF — even if it reports high earnings — is consuming cash rather than producing it, which limits its strategic flexibility and shareholder returns.
FCF yield (free cash flow divided by market capitalisation) is the cash-based equivalent of earnings yield (the inverse of P/E). It answers the question: for every dollar I invest in this business today, how much cash does it generate for me annually? Buffett has described looking for businesses with FCF yields implying a reasonable return relative to Treasury bonds — when a stock yields 8-10% in FCF and the 10-year Treasury yields 4%, the stock is offering a meaningful premium.
Each criterion, taken alone, can be misleading. The power comes from requiring all six to align simultaneously. A company can have a perfect track record and high ROE but be so expensive that all the future value is already priced in (criterion 5 fails). A company can have low debt and attractive valuation but generate no free cash flow (criterion 6 fails).
When all six criteria pass, the convergence is meaningful. You have found a business that: has survived and competes sustainably (1), has a moat reflected in stable margins (2), is not fragile from leverage (3), efficiently uses capital (4), is not overpriced (5), and actually generates cash (6). That combination is rare — which is why the score threshold is set at 80/100 before an alert is triggered.
When all six criteria align strongly, it indicates a potential high-conviction opportunity worth deeper review. Pro subscribers receive an alert when a stock reaches our top alignment tier, with the full breakdown included. The free weekly watchlist features stocks that are close to meeting the full criteria but haven't quite crossed the threshold yet.
