How To Analyze A Company's Economic Competitive Advantage (MOAT)
Finding and analyzing a company's MOAT is not rocket science.
The key for any company to thrive and keep on thriving is its competitive advantage, also known as its " MOAT.”
But how do we know if the company has a competitive advantage, and which form of competitive advantage?
Quite simple, to be honest.
Everyone makes it look like it needs hours, months, or years to figure it out.
It does not!
In this article, I’ll go over the competitive advantages, how to establish the durability of the competitive advantage, and how to properly analyze a company for its competitive advantage.
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For now, grab a pen and paper. Let us go over the competitive advantage.
Happy reading!
How to Tell If a Company’s Edge Will Last
Identifying companies with sustainable competitive advantages is key to long-term success in investing. These advantages—often described as “economic moats”—allow businesses to fend off competition, protect market share, and generate outsized returns over time.
Let’s break down the core elements behind a company’s defensibility and how you can critically assess them.
‘‘A good business is like a strong castle with a deep moat around it. I want sharks in the moat to keep away those who would encroach on the castle.’’ —Warren Buffett
Why Most Edges Don’t Last (and a Few Do)
In a truly competitive market, excess profits attract competitors, which, over time, erode margins and returns. The only way a business can protect its profitability is by erecting barriers to entry—also known as moats.
These moats can take various forms:
Brand power (e.g., Coca-Cola)
Network effects (e.g., Visa, Meta)
Switching costs (e.g., Microsoft Office)
Cost advantages (e.g., Walmart)
Regulatory licenses (e.g., Moody’s, utilities)
Think of a moat as the protective wall around a castle. The deeper and wider it is, the harder it is for rivals to breach. A company with a strong moat is better positioned to maintain pricing power, customer loyalty, and long-term profitability—even in the face of new entrants or technological disruption.
Is This Moat Just a Blip… or Built to Last?
When evaluating moats, two factors are essential: intensity and durability.
Intensity measures how strong the advantage is compared to competitors. Does the company lead by a mile or just a few steps?
Durability reflects how long that lead can be maintained, even as consumer trends shift or new technologies emerge.
Moats are not static. They can widen, narrow, or vanish altogether. A once-powerful brand can fade (think Yahoo or Blackberry), while others continuously reinvest to reinforce their advantage (like Apple or Amazon).
Investors should continuously monitor whether a company is investing in strengthening its moat or merely coasting on past success.
Show Me the Moat (In the Numbers)
It’s not enough to label a company as having a moat—you need evidence. That means digging into financial statements and asking:
Are margins sustainably higher than peers?
Example: Visa consistently posts net margins above 50%, far exceeding competitors in the payment space, thanks to its scalable network effects.
Contrast: Peloton had high margins during the pandemic, but they collapsed once demand normalized—revealing a lack of durable pricing power.Is return on invested capital (ROIC) consistently above the cost of capital?
Example: Moody’s posts ROIC well above 15%, signaling strong pricing power and minimal reinvestment needs—a classic asset-light moat.
Contrast: Traditional automakers like Ford have long struggled with ROIC barely exceeding their cost of capital, showing capital intensity with limited competitive advantage.Has market share expanded while maintaining profitability?
Example: Adobe has steadily grown Creative Cloud adoption while keeping gross margins over 85%, a sign of both moat and operating leverage.
Contrast: Snap has grown its user base, but profitability remains elusive—suggesting it hasn’t translated scale into defensibility.Do ecosystem dependencies lock in customers or partners?
Example: Microsoft’s Azure and Office 365 ecosystems create switching costs for enterprise customers—reflected in high retention and growing margins.
Contrast: Zoom saw rapid adoption but minimal switching friction—many users moved to Teams or Meet as alternatives emerged.
Qualitative observations (like brand strength or founder reputation) are helpful, but they must be backed by quantitative proof. A moat that doesn’t show up in the numbers may not be a moat at all.
The Hidden Cracks That Break Great Companies
While many investors focus on strengths, disadvantages can be equally revealing—and more dangerous if missed. Companies can be exposed to:
Outdated infrastructure
Example: AT&T struggled with legacy systems that made it slow to compete in modern wireless and media services, contributing to strategic missteps like the failed Time Warner merger.Weak management or misaligned incentives
Example: GE, under Jeff Immelt, made a series of overleveraged acquisitions and financial engineering moves that masked operational issues until the stock collapsed.
Incentives matter—if management is rewarded for short-term earnings rather than long-term value creation, investors should be wary.Over-reliance on a single customer, supplier, or geography
Example: Inphi Corporation (before being acquired by Marvell) derived a huge portion of revenue from just a couple of customers—raising risk if relationships soured.
Another: many European luxury brands took a hit when Chinese demand softened, exposing their geographic dependency.Poor scalability or high fixed cost base
Example: AMC Theatres was built on a capital-heavy model that struggled when foot traffic collapsed during COVID while streaming platforms adapted far more easily.
Even outside crisis scenarios, businesses with high operating leverage are exposed to brutal downside when revenue drops.Lack of innovation
Example: Blackberry’s failure to adapt to touchscreen smartphones and app ecosystems was a textbook case of losing relevance due to stagnation.
Kodak, too, sat on digital photography patents for years but failed to lead with them.
These vulnerabilities can erode even seemingly strong moats. Worse, they often remain hidden until stress—whether an economic downturn, technological disruption, or regulatory change—forces them into view.
Evaluating both the strengths and the cracks in a company’s structure is essential to making sound, forward-looking investment decisions.
TL;DR
Strong Moats Ensure Longevity
Businesses with sustainable competitive advantages can generate and defend excess returns for years.Evaluate Both Strength and Longevity
A true moat should be intense (superior to peers) and durable (resistant to disruption or commoditization).Empirical Analysis Beats Narratives
Skip the vague “moat” label—verify advantages through metrics like ROIC, margin trends, and retention data.Disadvantages Matter Too
Don’t just look for what’s working—identify what could break the business and price that risk accordingly.
Alright, now let us get to the juicy part!
The types of competitive advantages.
How to evaluate them
Check their durability and sustainability
Pros and cons
And much, much more.