The Concept Of Economic Moat In Evaluating Stocks

28 September 2023
2 min read
The Concept Of Economic Moat In Evaluating Stocks
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As an investor, what are the parameters you set while making investment decisions? Selecting stocks with consistent cash flow or brands with robust operating efficiencies is a good strategy.

Still, there are some uncertainties associated with stock investment. So what can you do? According to Warren Buffet, investments should be made in stocks with a wide economic moat.

The economic moat in the context of stock investment is something that provides a competitive advantage. The ‘moat’ indicates an edge a company has over its market competitors. A ‘moat’ separates it from its competitors. The pricing power of the company secures it from competition over a long period of time.

Tips to Identify Company with Economic Moat

Now that we are clear with the economic moat meaning, let’s get started with how you can identify companies with an economic moat: 

  • Outstanding Performance Even in Slow Economy

Most businesses fail to perform when the economy slows down. But even when the economy is slow, companies with an economic moat perform well. The performance of the company will be better than its competitors.

Some companies with an economic moat have even performed well even during the pandemic.

  • Increased Market Size

Companies having robust economic moats always stay ahead of their competitors. Their revenues and profits keep on increasing despite the condition of the economy. These companies stay ahead of any type of competition.

Why Is it Essential to Understand Economic Moat Before Making Investments?

If you are a valued investor, the best thing for you is to invest in a wide-moat stock at an underpriced value. Before making investment decisions, it is important to identify companies with an economic moat. You must check the following points in the financial reports to discover the economic moat:

  • Overall Sales Growth
  • Growth in Revenue and Profit
  • Profitability Enhancement, that is ROE and RoCE
  • Besides the financial report, it is suggested that you check the overall market sentiment in total.
  • Check on brands gaining a reputation in the market because of their quality products and services.
  • Companies with a good market reputation and profits are highly reliable.

Note: Start your joy ride in the world of investment by identifying economic moat companies and making a long-term investment.

Takeaways

  • If you are investing for the long term, choose companies with an economic moat.
  • This indicates long-term profitability. 
  • Financial reports of companies must be followed regularly to know the market condition of the company at all times.
  • Beyond the financial reports, it is also important to observe the overall brand reputation of the company in general.

Happy and Smart Investing!

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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