The 5 Core Financial Metrics Buffett Uses

1. ROE (Return on Equity) — The Core Measure of Business Quality

ROE measures how efficiently a company uses shareholder capital. Buffett views ROE above 15% as the threshold for an exceptional business — meaning every dollar of shareholder equity generates more than $0.15 in net profit annually.

In his 1992 letter, Buffett wrote: “The single most important measure of business quality is the rate at which a business can reinvest its capital at high rates of return.” ROE is the key metric for evaluating this ability.

→ Evaluate ROE with the Buffett Score Calculator

2. Gross Margin — Direct Evidence of Pricing Power

Gross margin reflects a company's pricing power over its products or services. High gross margin means customers are willing to pay a premium — the most direct financial evidence of an economic moat.

Apple maintains gross margins of 40–45%, Coca-Cola exceeds 60% — these numbers are the financial signature of wide moats. In contrast, retail typically operates at 20–25% gross margins, signaling structurally weak pricing power.

“What counts is sustained high gross margins — this indicates pricing power that competitors simply cannot replicate.”

— Warren Buffett

3. Revenue Growth — The Ability to Compound Sustainably

Buffett focuses on long-term, sustainable revenue growth — not one-time spikes from acquisitions. The 5-year compound annual growth rate (CAGR) is the best tool for measuring sustained growth.

Growth must be quality growth. The earnings from that growth should manifest as free cash flow, not just accounting profits. If revenue grows but cash flow deteriorates consistently, this is not the kind of growth Buffett values.

4. Debt-to-Equity Ratio — The Backstop of Financial Resilience

Buffett is cautious about debt. While moderate leverage can amplify growth, highly leveraged businesses become fragile in downturns. Berkshire Hathaway itself uses minimal leverage, which allows it to act decisively during crises.

In his 1987 letter, Buffett wrote: “Only in very rare cases should a company incur debt-financing. Truly excellent businesses generate good returns without needing leverage at all.”

5. Free Cash Flow — The True Source of Business Value

In Buffett's valuation system, free cash flow is the core. All valuation methods — DCF, Owner Earnings — ultimately measure a business's ability to generate free cash flow.

Owner Earnings is Buffett's refinement of FCF: Net Income + D&A - CapEx. This represents a more conservative estimate of true earnings power. In his 1991 letter, Buffett wrote: “Owner earnings are the true figure — they represent the cash that actually stays in your pocket each year.”

→ Use the DCF Calculator to evaluate free cash flow

Putting It Together: The ValueOS Score

The ValueOS Buffett Score integrates all five metrics into a single 0–100 composite rating:

“It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price.”

— Warren Buffett, 1992