Competitive Advantageous MoAT Demystified
Competitive Advantageous MoAT Demystified
A.
Basic Concepts :
Historical data shows that extreme ROIC values (either very high or very low) tend to revert closer to the industry or market average over time.
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Some are still having quite significant economy spread (ROIC - WACC).
That is due to their higher Competitive Advantage MoAT which is shown in the form of ROA.
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I would rather say :
In the long run, ROA may regress close to the mean between ROA & Clean Total Assets Cost (CTAC).
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Clear message from Henry Singleton : ROA is the mirror of the MoAT
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High Competitive Advantageous MoAT will achieve High ROA.
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Low Competitive Advantageous MoAT will achieve Low ROA.
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i.
“MoAT Grows The Growth”
The Mother of Growth is the MoAT.
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ii.
The four sources of structural competitive advantage are intangible assets, customer switching costs, the network effect, and cost advantages.
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If you can find a company with solid returns on capital and one of these characteristics, you’ve likely found a company with a moat.
— Pat Dorsey
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iii.
Analysis:
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Network Effect is manifested in the Asset Turnover Ratio (Rev/Total Assets).
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Intangible Assets & Customer Switching Cost are manifested in the 1st Level Profit Efficiency Yield, namely Gross Profit Yield from Revenue (GP/Rev).
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Company Operational Cost Advantage is manifested in the 2nd Level Profit Efficiency Yield, namely The Quality of Gross Profit, i.e. Net Profit Yield from Gross Profit (NP/GP).
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MoAT
= Synergized Structural Competitive Advantage
= Network Effect × (Intangible Assets & Customer Switching Cost) × Company Operational Cost Advantage
= Asset Turnover Ratio × Gross Profit Yield from Revenue × Net Profit Yield from Gross Profit
= Rev/Total Assets × GP/Rev × NP/GP
= GPA × NP/GP
= NP/Total Assets
= ROA
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Gross Profitability (GPA)
= Mother of Net Profitability (ROA)
= Mother of MoAT
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NP/GP
= Quality of Gross Profit (in generating net profit)
= Father of Net Profitability (ROA)
= Father of MoAT
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iv.
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In short,
Structural Competitive Advantage
= MoAT
= Profitability
= Productivity
= Earning Power
= ROA
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v.
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“All new projects should return at least 20% on total assets.”
— Henry Singleton
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Warren Buffett once said: “Henry Singleton of Teledyne has the best operating and capital deployment record in American business.”
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Reference 1:
https://www.gurufocus.com/news/109353/henry-singleton-a-master-of-capital-allocation
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Reference 2:
25iq. com/2014/11/08/a-dozen-things-ive-learned-from-henry-singleton-about-value-investing-venture-capital/
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vi.
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Very broadly speaking, a nonfinancial company that can consistently generate an ROA of 7 percent or so likely has some kind of competitive advantage over its peers.
— Pat Dorsey, Author of The little book that builds wealth
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B.
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i.
Intrinsic Earning Value (MoAT Model)
= MoAT × EPS
= ROA × EPS
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ii.
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Significance of MoAT:
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MoAT (ROA) ≤ 10%
= Lower Compounding Strength & Shorter Compounding Period
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15% ≤ MoAT (ROA) ≤ 20%
= Strong Compounding Strength & Long Compounding Runway Period
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MoAT (ROA) ≥ 25%
= Supreme Compounding Strength & Extraordinary Long Compounding Runway Period
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Opportunity Cost (Measured In ROA Realm)
= Cost of Opportunity
= P/E ÷ ROA
= Let's say 0.6189
= Bought a Dollar worth of Opportunity with $ 0.6180
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Reference 1:
Return on Assets Definition and Calculation: A Comprehensive Guide
https://finally.com/blog/accounting/return-on-assets-definition-and-calculation/
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Reference 2:
Mastering Return on Assets: A Comprehensive Guide
https://beaumont-capitalmarkets.co.uk/mastering-return-on-assets-a-comprehensive-guide/
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Reference 3:
Revving Up Profits: Mastering Return on Assets ROA for Success in the Automotive Industry
https://kanboapp.com/en/industries/automotive/revving-up-profits-mastering-return-on-assets-roa-for-success-in-the-automotive-industry/
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Reference 4:
“5 Signs of a Competitive Advantages” : Hints Hidden in the Financial Statements
https://www.masterinvesting.in/signs-of-a-competitive-advantages-hints-hidden-in-the-financial-statements