A business needs to have a significant competitive advantage to survive in today’s cut-throat and highly competitive business environment. A business can be said to have a competitive advantage when it is able to withstand competitive attacks and remain in the market.
How do you find the next Warren Buffett? An acronym that you are likely to see in the next decade or so is EBITDA (earnings before interest, taxes, depreciation, and amortization). Warren Buffett has said EBITDA matters more than EPS (earnings per share).
[Updated: 03-Jul-2021] What is an economic moat in the economy? In the context of equity investing, the best known term for this is competitive advantage. What is it? It is a term used to describe the advantage a company has over its competitors. (See the list here…).
If Warren Buffett was looking for stocks in India, which Indian companies would catch his eye? He will invest in stocks with a wide economic diversification. It’s simple: A company with a big moat acts like it has a monopoly on the market.
What is the advantage of a monopolistic enterprise? They have considerable pricing power. As a result, they operate at higher margins than companies with lower benefits.
List of companies mutating in India (Warren Buffett stocks)
Updated: 03 July 2021
|SL||Name||RETURN ON EQUITY (%)||ROE-5Y (%)||RoCE-5Y (%)||PEG||Rated GMR|
|10||New India Assuran||8.73||8.44||9.99||1.36||70|
Before we can understand what an economic moat is, we must first understand what a moat is.
Economic dominance gives companies pricing power. What is pricing power? Whether a company raises the price of its products or services, there will be no drop in demand.
Examples: BMW, Bose, Rolex, Gucci, Harley Davidson, etc. These few companies (brands) have the most leeway. They have gained cult status with their customers. People will buy them anyway. Owning such branded products gives the buyer a sense of price.
The desire to buy the products of these brands is so great that people often spare no expense to buy them. This gives the company pricing power, which ultimately translates into higher profits (EBIT, PAT and EPS growth).
That’s a separate issue. The people doing these searches spend months identifying these companies. But we don’t have to go that far. Our selection criteria are sustainable profitability and company size.
What is the logic behind this? RV companies are necessarily companies that operate at high profitability (margins). But it is also important to check the stability of the edge. Therefore, single year margin figures are not sufficient. The consistency of the figures over the last 5 to 10 years and the high averages should be kept in mind.
We can use ROE and RoCE as financial measures of profitability.
After we obtain the list of high-performing companies, we apply a size filter. This amount can be expressed in terms of turnover or market capitalisation. Personally, I prefer market capitalization as a second filter.
Companies selected on the basis of these two criteria are what might be called Warren Buffett stocks.
Read more: How to identify companies with strong competitive advantages.
For value investors, there is nothing better than investing in a company with wide margins. But a big moat is not a financial measure or a ratio that can be easily measured. The researcher must draw a conclusion based on the self-study (the four actions listed above). In addition to the company’s finances, it is also advisable to keep an eye on the general market situation. We can try to find brands that are known for their high quality products and services.
Thank you for reading and good luck with your investments.
Next >> Industry analysis (competitive advantage)
Frequently Asked Questions
How do I find a company’s economic moat?
A company’s economic moat is the value of the company’s assets that makes it difficult for competitors to enter the market.
How do I know if I have economic moat?
You have economic moat if you have a sustainable competitive advantage that will allow your company to earn high profits for a long time.
What is a good economic moat?
An economic moat is a competitive advantage that gives a company a sustainable competitive advantage in a market.
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