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Commentary

Not All Moats Are Created Equal

Some sources of moats are more potent than others.

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When assigning economic moat ratings, Morningstar analysts and the Morningstar economic moat committee take both quantitative and qualitative considerations into account.

On the quantitative side, we look to the spread between forecast returns on invested capital and our assumed weighted average cost of capital, which represents economic profit generation. Per our methodology, the durability of economic profits is far more important than magnitude. Additionally, clear evidence must exist that the company benefits from at least one of five moat sources: intangible assets, cost advantage, switching costs, network effect, and efficient scale.

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Andrew Lane does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.