Economic moats protect companies from competition, enabling them to earn more money for a long time and therefore making them more valuable to investors.
Start looking for companies with consistent and above average operating performance.
A steady return of 7% or more indicates effective deployment of resources across the enterprise.
A stable return of 15% or more with little or no debt indicates effective use of shareholders’ funds.
A solid return of 20% or more is a satisfactory return on investment.
A high and consistent operating profit margin indicates the firm’s pricing power.
Good year-on-year excess cash generation. Unless it is positive, expansion can only be financed by increased debt or equity.
The expected growth rate for the business over the medium term. This gives a feel for future value.
Some industries are easier to create a competitive advantage than others. Ideal industries are Media, Business Services, Financial Services, Consumer Goods and Health Care Services.
The goodwill that keeps on giving.
A brand that can charge a premium price relative to similar competing products without losing market share or can promote regular repeat business.
A diverse portfolio of patents and a track record of creating successful patented products.
Regulations that limit competition. A large number of small-scale rules are better than big rule as large rule can be changed.
A business with lots of stick customers.
The cost and hassle of switching to a competitor’s product or service are more significant than the benefits.
The company’s products or services are tightly integrated with its customer’s daily operations.
A large network of assets or customers.
The value of the company’s product or service increases with the number of people regularly using it. E.g. Credit cards and online auctions.
A business with information sharing products or connecting users together.
Is the network open up for other participants?
The most efficient operator in the industry.
The company is close to its customers enabling it to deliver a cheaper and more superior service.
The business owns a unique world-class asset that is hard to replicate.
The company can purchase goods at a bigger discount price.
The company has the most efficient and lowest cost process in the industry.
Big fish in a small pond make big money.
The business owns a large distribution network that takes a long time and a lots of money to build.
The company is bigger than its competitors and dominate its niche markets.
Making more goods with the same fixed costs.
Don’t be fooled by these illusory competitive advantages.
Produces great short-term results until an innovated product comes along from a competitor.
Technology and market trend can dissipate market share very quickly if the company failed to maintain its competitiveness.
People eventually do move on.
Finding quality company with consumer monopoly.
How an enterprise generates revenue and makes a profit from...
Warning signs to look out for.