A Look at How Our Moat Ratings Have Performed through 2017
Watch: wide-moat firms have a higher return on invested capital, and trade at higher P/E multiples, than their no- and narrow-moat peers.
Andrew Lane: Within Morningstar's global equity research group, we assign an economic moat rating to each of the more than 1,500 companies that we cover. The economic moat rating determines if a company possesses a sustainable competitive advantage that will help it fend off competitors that might otherwise eat away at its economic profits. Only 16% of the companies we cover have a wide economic moat rating, while 43% have a narrow moat, and the remaining 43% have no moat.
We recently published a report titled "Not All Moats Are Created Equal" that takes a closer look at various profitability and performance metrics across each of these three moat rating cohorts. Across a number of different metrics--including returns on invested capital, returns on equity, and operating margins--wide-moat firms outperformed narrow-moat firms, and, in turn, narrow-moat firms outperformed no-moat firms. Let's focus for a moment on returns on invested capital, which is the primary metric we consider when assessing quantitative evidence for the presence of an economic moat.
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