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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 context of competitive advantage?

A moat is a durable competitive advantage, such as a strong brand, cost leadership or high switching costs, that protects a company's profits and returns from competitors over a long period. It is structural, not a seasonal sales boost, a reserve or a loan covenant.

  1. AA durable advantage that protects a company's profits from competitors over a long periodCorrect
  2. BA temporary rise in sales caused by a seasonal festival demand
  3. CA reserve created out of retained earnings for future expansion
  4. DA covenant restricting the company from borrowing beyond a limit

Explanation

An economic moat is a sustainable competitive advantage such as brand, cost leadership, switching costs or network effects that protects returns on capital. Seasonal sales spikes, reserves and loan covenants do not describe a structural advantage over rivals.

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