To analyze a company’s economic moat, follow these four steps: 1. Evaluate the firm’s historical profitability. Has the firm been able to generate a solid return on its assets and on shareholders’ equity? This is the true litmus test of whether a firm has built an economic moat around itself. 2. If the firm has solid returns on capital and consistent profitability, assess the sources of the firm’s profits. Why is the company able to keep competitors at bay? What keeps competitors from stealing its profits? 3. Estimate how long a firm will be able to hold off competitors, which is the company’s
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