-

Understanding the Economic Moat

What is a Moat? An economic moat refers to a business's ability to maintain competitive advantages to protect its long-term profits and market share. Just like a medieval castle, a wider moat makes it harder for competitors to attack the business's margins.

How We Calculate It: Up to ten years of accounts, four parts. Returns on capital (40 points): how high the return on invested capital has been, in how many years it reached 10%, and how steady it was. Pricing power (25): gross and operating margins - how high, and how little they move. Lasting growth (20): revenue growth over the whole span (steady single digits are enough), how many years it grew, years of positive free cash flow and the worst single-year fall - every year counts the same. Balance sheet (15): years of cash flow to repay the debt, and whether the share count keeps rising. Banks and insurers are judged on return on equity and assets; REITs and utilities, which run on big asset bases and planned debt, on gentler lines. Fewer than five years of accounts caps the score at 6. A turnaround - losses earlier, then three profitable years - has its returns and margins judged on those three years when that helps, also capped at 6. Funds get no moat score.

What The Math Can't See: Quantitative algorithms only tell the historical story. They cannot measure qualitative factors like Brand Power (e.g., Apple), Network Effects (e.g., Visa), Switching Costs (e.g., Enterprise Software), or Patents/Regulatory Licenses. You must always combine this scorecard with fundamental business analysis.