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. 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