Moat
A durable structural advantage that lets a company earn returns above its cost of capital for many years without being competed away.
How it is identified
Test: returns on capital stay above the cost of capital across a full cycle, and the reason can be named as a specific barrier
Unit
qualitative
In depth
The recognised sources are few: intangible assets such as brands and licences, switching costs, network effects, cost advantages from scale or location, and efficient scale in markets too small for a second entrant. If none can be named, high returns are probably cyclical or temporary and will attract competition. The test is quantitative as well as narrative — a genuine moat shows up as return on capital persistently above the cost of capital, not as a good story. Beginners often confuse a good product with a moat: a superior product that a competitor can replicate next year is an advantage without a barrier.
Worked example
Two companies both earn 25% on capital. One is protected by a regulatory licence with fifteen years to run; the other simply had a strong product year. Only the first can be modelled as sustaining that return, and the difference is worth several times the valuation multiple.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Moat” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.