Not all moats are the same. Some moats are wider but not as durable, while others might be durable but have little growth opportunities. The 3 things that determine the attractiveness of a moat and how much the business is worth are its return on capital, durability, and reinvestment opportunities. Return on Capital Return on […]
I previously wrote about the 7 types of moats of quality companies. Another way to look at moats is from a capital allocation perspective. A few years ago, Connor Leonard from IMC made a wonderful presentation on 3 types of capital allocation moats: Legacy moat Reinvestment moat Capital-light compounder Legacy moat is companies that earn […]
What differentiates a good business that earns a long-term above-average return from a mediocre business that, at best, only earns a return close to its cost of capital? A good business can control its supply while a mediocre business can’t. Take Ferrari. Ferrari has a 24% operating margin with above-average return on capital, higher than […]
Scale economies is one of the seven moats of quality companies. Scale economies mean the fixed cost per unit falls as volume increases. Fixed cost is indivisible. And indivisibilities are more likely when an activity is capital intensive. The 3 main sources where scale arises are distribution, manufacturing and niche market. A dense distribution network […]
Moat is independent of market size The common misunderstanding for moat like scale economies is that it only exist in large markets. While a company has to reach a certain size to achieve scale advantage, it is in relative to the size of its competitors, not the size of the market. A company that is […]
I have always interested to find out what makes a company tick. Why some companies succeed while others fail? What enables a company to grow continuously for decades when others fail to maintain that even for a few years. Is it management? The nature of the industry? The products a company offers? Or is it […]