NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Business and Governance
Which of the following best describes an 'economic moat' when an analyst evaluates a company's business?
An economic moat is a durable competitive advantage, such as a strong brand, cost leadership, switching costs or network effects, that protects a company's long-term returns on capital from competitors. It is not a temporary cyclical profit boost, a cash reserve or a shareholding limit.
- AA durable competitive advantage that helps protect long-term returns on capital from competitorsCorrect
- BA temporary rise in profits caused by a cyclical upswing in demand
- CThe amount of cash reserves held to meet short-term obligations
- DThe legal limit on promoter shareholding in a listed company
Explanation
An economic moat is a sustainable competitive advantage such as brand, cost leadership, network effects, switching costs or regulatory licences. It protects returns on capital over a long period. A cyclical profit rise is not durable, and cash reserves and shareholding limits are unrelated concepts.
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