Economic Moat
Does the company earn returns above its cost of capital?
Definition
Economic Moat quantifies the gap between a company's return on invested capital (ROIC) and its weighted average cost of capital (WACC). A positive and persistent moat indicates a durable competitive advantage.
Formula
Where:
- ROIC: Mean ROIC over the analysis period
- WACC: Weighted Average Cost of Capital (default: 10% in Finsco)
Interpretation
| Range | Assessment |
|---|---|
| > 10% | Wide moat — significant competitive advantage |
| 5% – 10% | Narrow moat — moderate advantage |
| 0% – 5% | No moat — earning roughly cost of capital |
| < 0% | Value destruction — earning below cost of capital |
Compound effect: A company with 20% ROIC and 10% WACC reinvesting its earnings will compound shareholder value at ~10% per year on incremental capital. Over decades, this creates enormous value.
In Finsco
Computed by the audit moat command. The advisory uses median ROIC (not mean) to resist outlier years. WACC is configurable via --wacc (default: 0.10).
audit moat --wacc 0.12
Related Metrics
- ROIC — the numerator
- ROIC Stability — is the moat durable?
- Gross Margin CoV — pricing power stability