Definition
Economic Moat
A moat is a durable competitive advantage that protects a company's profits from rivals, like a castle's moat keeps out attackers.
Popularised by Warren Buffett, an economic moat lets a business sustain high returns over many years. Sources include strong brands (pricing power), network effects, low-cost production, high switching costs, patents, or regulatory licences.
In India, examples include consumer franchises with sticky brands, exchanges and depositories with regulatory moats, and dominant platforms with network effects. A wide, widening moat is what lets a company compound earnings and is a prime trait sought by long-term and quality investors.
Related terms
- Return on Capital Employed (ROCE)ROCE measures operating profit relative to all capital used, both equity and debt, showing how efficiently a company generates returns from its total funding.
- Intrinsic ValueIntrinsic value is the estimated true worth of a business based on its fundamentals and future cash flows, independent of the current market price.
- Quality InvestingQuality investing focuses on businesses with strong, durable fundamentals, high returns on capital, low debt, and consistent earnings, often paying up for excellence.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.