Valuation
Economic moat
Also called Competitive advantage
A durable structural advantage that lets a company keep earning high returns without being competed away.
How it works
In a functioning market, high profits attract competition until they are normal. A moat is whatever prevents that: network effects, switching costs, scale advantages, brands, patents, regulatory position, or a genuine cost edge.
Moats matter because they determine how long above-average returns persist, and duration is what most of a valuation is made of.
Where it misleads people
Almost every high-margin company is described as having a moat, usually after the margins appeared. The test is whether you can name the specific mechanism preventing entry, not whether the returns have been good.
Related terms
- Return on invested capitalOperating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
- Value investingBuying assets for less than an estimate of their intrinsic worth, with a margin of safety.
- Terminal valueThe estimated value of all cash flows beyond the explicit forecast period in a valuation.
- Gross marginWhat proportion of revenue is left after the direct cost of producing what was sold.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.