Hey Guys welcome to module 3 in this module I'll teach you how to identify a company's economic moat
as well as understand how wide it is and why it's so important.
So what exactly is an economic moat while regular cash flow well managed debt and a competitive advantage
all play a role in enduring business success.
The ability to develop a wide economic moat is the key to what separates the winners from the losers
over the long term.
What we referred to as a moat is what other people might call competitive advantage.
It's something that differentiates a company from its nearest competitors in very simple words an economic
moat is basically anything that gives a business some form of built in protection for its ongoing generation
of cash flow.
If you picture a company as a castle that is constantly under attack by its enemies or competitors you'll
have a better understanding of just how important an economic moat is in helping a business to thrive
and survive in the marketplace.
And here's what you should keep in mind when evaluating a company without one or more protective Moat's
firmly in place of formerly profitable business will soon find itself unable to maintain its market
share and its revenues will begin to drop off.
This also means that a company without a unique economic moat can't survive in the long term.
It will be harder for it to compete with other companies within the same industry and it will be harder
for direct cover for market downturns recessions or financial disasters.
Remember that a competitive advantage is essentially any factor that allows a company to provide goods
or services that are similar to those offered by its competitors.
And at the same time outperform those competitors and profits.
So the easiest way to determine the size of a company's economic moat is look at its historical operating
performance to evaluate a company's operating performance.
You can use some profitability and efficiency ratios.
Then you can compare its ratio values with that of its competitors and the industry average.
If the company you're evaluating maintains a better and more efficient operating performance than its
competitors it's clearly the winner.
And you can expect that it will survive in the next decades.
In the next video I'll give you a complete list of economic moats that a company may have.
And I'll also talk a little bit more about economic moats and why they're so important.
OK.
See you in the next video.