The measure of the competitive barrier, if any, that gives a company an advantage over its rivals and allows it to generate above-average returns on invested capital.
Four major types of economic moats are
- high customer switching costs
- economies of scale
- intangible assets such as brands or patents
- the network effect
Morningstar divides stocks into three categories according to moat size:
- wide moat (companies with the strongest competitive advantage)
- narrow moat (those with some competitive advantage)
- no moat (those with no sustainable competitive advantage)