Sublime

What separates a bad company from a good one? Or a good company from a great one? In large part, it’s the size of the economic moat a company builds around itself. The term economic moat is used to describe a firm’s competitive advantage—in

The stronger a firm’s competitive advantage—that is, the wider its moat—the more likely it will be able to keep competitors at bay and generate a reliable stream of cash flows.

Think about an economic moat in two dimensions. There’s depth—how much money the firm can make—and there’s width—how long the firm can sustain above-average profits.

The key to identifying wide economic moats can be found in the answer to a deceptively simple question: How does a company manage to keep competitors at bay and earn consistently fat profits?

A firm that has consistently cranked out solid ROEs, good free cash flow, and decent margins over a number of years is much more likely to truly have an economic moat than a firm with more erratic results.