A business may find itself naturally endowed with any of these four types of moats, or it may--with great effort--be able to dig itself a moat over time. The unifying factor is the influence a moat will have on return on equity. Companies with low ROEs find growth difficult and expensive, forces that are sure to show up in weak dividend growth prospects. By contrast, firms with high ROEs get the maximum bang for the reinvested dollar, leaving plenty of cash to return to shareholders.
Not every company with a history of high ROEs has a moat, however. Only sustainable, structural competitive advantages count toward an economic moat; temporary advantages can't be relied on. Think of mall-based fashionretailers like Aeropostale (ARO) and American Eagle Outfitters (AOS). They've had some monstrous ROEs, with 30 percent not uncommon. But their ability to generate high returns is contingent on staying ahead of fashion trends, an almost impossible task over any length of time. Gap (GPS) once had a record like that, but just a couple of fashion miscues several years ago trashed profitability to a level from which the retailer still hasn't recovered.
When evaluating moats, it's necessary to look at current profitability as well as the structural state of the business. A good rule of thumb is to assume a company doesn't have a moat unless proved otherwise. Regardless of how high ROEs might be right now, it is only when the economic characteristics of the business line up with one or more of the four moat factors previously listed that we can have confidence in the sustainability of high ROEs. In other words, the key is not just to seek firms with high ROEs, but to know why those ROEs are high and should stay high into the indefinite future.
歡迎關注公眾號一起交流學習吧：
