An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces.

Morningstar, Inc. has established a Morningstar Economic Moat™ ranking, which measures the sustainability of a company’s profits. According to Morningstar an economic moat refers to how likely companies are to keep competitors at bay for an extended period. Morningstar reviews a company’s historical financial performance—companies that have generated returns on higher than their cost of capital for many years usually have a moat. Morningstar also carefully evaluates the source of a company’s excess economic profits.