Moat rating
How wide is the moat, and does it show up in the numbers?
- 1
Does it earn more than its capital costs?
Damodaran's test. Take return on invested capital (return on equity for banks) and subtract the cost of capital, using his industry benchmarks. Average it over at least 5 years. The gap, in percentage points, scores the spread.
- 2
For how long?
Excess returns attract competitors, so they tend to fade. The share of years the company beat its hurdle scores durability. Fewer than 5 years of record scores at most half.
- 3
Where does it come from?
Five lenses, each scored 0 to 10 with the evidence written out: brand and pricing power, barriers to entry, switching costs, network effects, economies of scale.
- 4
Put the halves together
Numbers = spread × 60% + durability × 40%. Overall = numbers × 50% + sources × 50%. Wide moat: 7 or more overall and 7 or more on the numbers. Narrow: 4 or more overall and 3 or more on the numbers. Otherwise, no moat.
Spread score
| Average excess return | Score |
|---|---|
| 20 pp or more | 10 |
| 12 to 20 pp | 9 |
| 8 to 12 pp | 8 |
| 5 to 8 pp | 7 |
| 2 to 5 pp | 5 |
| 0 to 2 pp | 3 |
| Below the hurdle | 0 |
Try it yourself
Wide moat
Excess return +8.6 pp scores 8 for spread. 5 of 5 years above the hurdle scores 10.0 for durability.
Returns well above the cost of capital, sustained, with clear reasons why. That's what a wide moat looks like.
For education only. Not financial advice.
How to read the result
Technical
The numbers half compares return on invested capital (return on equity for banks) with the cost of capital, averaged over at least five years.
Plain English
A moat is only real if the company keeps earning more than investors need. A good story with ordinary returns isn't a moat.
Technical
The sources half scores pricing power, barriers to entry, switching costs, network effects and economies of scale from 0 to 10.
Plain English
These say where the extra profit comes from, so you can judge whether it will last.
Technical
A wide moat needs 7 or more overall and 7 or more on the numbers. Weak numbers cap the grade at narrow or none.
Plain English
We won't call a moat wide unless the returns prove it, however good the story sounds.
A worked example
DBS: return on equity averaged 15.9% over FY2021 to FY2025 against a 7.34% cost of equity, above it in all five years. Numbers 8.8, sources 6.8, overall 7.8 out of 10: a wide moat.
What it can't tell you
- Past excess returns don't guarantee future ones. Damodaran's data shows returns drifting back towards the cost of capital over time.
- Lens scores are rasinbunlover's judgment, written out with the evidence so you can disagree.
- A wide moat says nothing about price. A great business can still be an expensive stock.
- Cost of capital benchmarks are industry averages, not company-specific estimates.
From the carousel: What a moat looks like in the numbers
Source: Aswath Damodaran, NYU Stern: cost of capital and return on capital by industry, data as of January 2026. Checked 19 Oct 2026.
Source: Aswath Damodaran, "The X Factor in Value: Excess Returns in Theory and Practice". Checked 19 Oct 2026.
Source: DBS Group Holdings Annual Report 2025, five-year summary, p. 175. Checked 19 Oct 2026.
For education only. Not financial advice.