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Company quality checklist (economic moat)

Enter 5 to 10 years of results and see whether the company has the traits Warren Buffett looks for: high and consistent return on equity, growing earnings, stable margins, little debt and retained earnings that turn into market value, the famous $1 retained earnings test.

Educational simulation. Not investment advice. Results are estimates based on the data you enter and do not replace advice from a qualified professional.

Reviewed on Oct 31, 2026

Annual figures in millions. Shareholders’ equity and net debt at each year-end. Example values.

Terms: Equity · ROE · Sustainable growth

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—Quality criteria met
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Checklist

Criteria inspired by Buffett’s letters to Berkshire Hathaway shareholders.

Return on equity and net margin

Consistency matters more than one exceptional year. The dashed line marks a 15% ROE.

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Revenue and net income

Year-by-year growth, in millions.

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$1 retained earnings test

Earnings the company kept (did not pay out) over the period, compared with the increase in market value.

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Metrics by year

The summary lists your inputs, results, formulas, assumptions and sources. The full report also includes the charts and interpretations, in color. In the print dialog, choose Save as PDF.

Method, assumptions and sources

Formulas

Year ROE = net income ÷ average equity (start and end of year)
Net margin = net income ÷ revenue; payout = dividends ÷ net income
Sustainable growth = ROE × (1 − payout), average of the last 3 years
$1 retained earnings test = increase in market value ÷ sum of retained earnings (earnings − dividends) since the first year
Earnings and revenue growth: compound annual rate between the first and last year

Assumptions and limits

  • The thresholds are general benchmarks and vary by industry (banks, insurers and utilities have their own characteristics).
  • Company figures come from the annual financial statements filed with the securities regulator and posted on the investor relations website.
  • Calculation tool using data entered by the user. It is not securities analysis or a recommendation to buy or sell; investment decisions are the user’s responsibility.

Official sources and references

Frequently asked questions

What is an economic moat?

A durable advantage that protects a company’s profits from competitors: a strong brand, lower costs, network effects, patents or high switching costs. In the numbers, it shows up as high and stable returns for many years.

What ROE is considered good?

A common benchmark is 15% or more on average, without relying on heavy debt, and above 12% even in bad years. Typical levels vary by industry: banks and utilities usually have different numbers from software or consumer brands.

What is Buffett’s $1 retained earnings test?

Every dollar of earnings a company keeps instead of paying out should, over the years, add at least one dollar of market value. Above 1, management is reinvesting well; below 1, shareholders would have been better off with dividends.

How do I calculate sustainable growth?

Multiply ROE by the share of earnings retained (1 − payout ratio). A 20% ROE with a 40% payout gives about 12% a year. It is how fast the company can grow using only its own profits, without new debt or shares.

How do I read the result of the example on the page?

In the example, with six years of a fictional company, it meets all 8 criteria. Average ROE is 20.1% and earnings grow 12.1% a year; in the $1 retained earnings test, each dollar kept became $2.23 of market value.

How many years of data should I use?

At least five, ideally ten, so you cover good and bad years in the economy. With only a few years, one exceptional result or a one-off crisis distorts the averages. Use the consolidated numbers from the annual reports.

Is a company that meets every criterion a good buy?

Not necessarily. The checklist judges the quality of the business, not the share price: a great company bought at too high a price can return little for years. After the checklist, estimate fair value and compare it with the price; consider talking to a licensed professional.

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How to judge a company’s quality before investing

Warren Buffett looks for businesses with a durable competitive advantage, the “economic moat” that protects profits from competitors for many years. A moat is hard to measure directly, but it leaves marks on the financial statements: high and steady returns, growing earnings, stable margins and little debt.

The eight criteria

CriterionWhy it matters
Average ROE of at least 15%The company earns well on shareholders’ money.
ROE above 12% every yearThe return holds up even in bad years.
Earnings grew in at least 80% of the yearsGrowth is regular and predictable.
Earnings grow more than 7% a yearThe business is expanding faster than inflation.
Stable net marginThe company can pass on costs: pricing power.
Net debt up to 2 years of earningsDebt could be repaid quickly.
$1 retained earnings test above 1Reinvested earnings create value.
Sustainable growth of at least 8%The company can grow without new debt or shares.

The $1 retained earnings test

Buffett wrote that every dollar a company keeps instead of paying out should, over time, add at least one dollar of market value. Add up the earnings retained over the period and compare with the change in market value. If $10 billion retained became $25 billion of market value, each dollar became $2.50.

Sustainable growth

Sustainable growth = ROE × (1 − payout ratio). A company with a 20% ROE that pays out 40% of earnings can grow about 12% a year using only its own profits. Growth well above this level usually requires debt or new shares.

Limits

The criteria are general benchmarks. Banks, insurers and utilities have different typical numbers, and one-off events can distort a single year. Use at least five years of data and read the annual reports to understand the reasons behind the numbers.