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NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Business and Governance

In analysing a company's business model, which of the following best describes a 'moat' in the sense used by equity research analysts?

A moat is a durable competitive advantage, such as a strong brand, cost leadership, network effects or high switching costs, that protects a company's profitability and returns from being eroded by competitors over a long period.

  1. AA durable competitive advantage that protects a firm's returns from being competed awayCorrect
  2. BA temporary discount offered to customers during a promotional sale
  3. CThe statutory reserve a company must hold against its borrowings
  4. DThe gap between a company's market price and its book value

Explanation

An economic moat is a sustainable competitive advantage, such as brand strength, cost leadership, network effects or switching costs, that lets a firm earn above-average returns for long. The other options describe a promotion, a reserve requirement and a price-to-book gap, none of which is a moat.

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