What is a moat?
The term moat was popularised by Warren Buffett to describe a company's ability to defend its market position over the long run. Like the moat of water around a castle, it makes competitive attacks difficult or costly.
Without a moat, a profitable company inevitably attracts competitors who copy its model, cut prices and erode its margins. With a moat, it can maintain - or even improve - its profitability despite competitive pressure.
Why a moat matters for a long-term investor
Over 10 years, a company with a strong moat tends to keep its ROE above its cost of capital. Without a moat, convergence towards the sector average is inevitable. That is the difference between a stock that re-rates and one that stagnates despite good short-term results.
Over 10 years, a company with a strong moat tends to keep its ROE above its cost of capital. Without a moat, convergence towards the sector average is inevitable. That is the difference between a stock that re-rates and one that stagnates despite good short-term results.
The 5 types of moat
Network effects
The value of the service rises with the number of users. The more participants there are, the harder it is to leave.
e.g. a sector-specific B2B marketplace, a specialised matchmaking platform
Switching costs
Changing supplier is costly, risky or slow. An ERP embedded in a factory's processes for 15 years cannot be replaced in a single quarter.
e.g. vertical ERP software, production equipment with lengthy certification
Intangible assets
Strong brands, patents, exclusive regulatory licences. A competitor can copy the product but not the authorisation or the brand.
e.g. a pharma lab with an active patent, a regional luxury brand
Cost advantage
Producing more cheaply than everyone else thanks to scale, access to unique resources or a proprietary process.
e.g. an industrial firm with exclusive access to a local raw material
Efficient scale
A niche market whose size is only profitable for 1 or 2 players. A new entrant would destroy its own profitability.
e.g. a specialised regional distributor, a niche industrial-services provider
The accounting signals of a moat
A moat is confirmed in the numbers. Here are the metrics to track over 5 consecutive years:
ROE > 15%
over 5 consecutive years - a sign of structurally high return on equity
Stable EBITDA margin
resilient through economic cycles - visible pricing power
FCF / NI > 80%
earnings genuinely convert into cash - no leakage into working capital
ROCE > WACC
creates value above the cost of capital - sustainably
Low capex / revenue
existing assets are enough - no constant investment needed to stay competitive
Customer churn < 5%
when disclosed - an indicator of real switching costs
Moat checklist for a small cap
Tick the criteria that apply to the company you are analysing:
🏰 Moat assessment
Financial signals (5 years)
ROE above 12% over the last 5 financial years
Stable or rising EBITDA margin over 5 years
Positive Free Cash Flow over the last 5 financial years
ROCE above the cost of capital (estimated at 8-10%)
Structural advantage
The company occupies a niche where customers find it hard to leave
It holds patents, certifications or licences that protect its market
Its brand or reputation is a decisive purchase factor for its customers
A new entrant would have to invest heavily to replicate its offering
Pricing power
The company has raised prices without losing major customers
Its margins held or improved despite input-cost inflation
Management points to solid backlogs or recurring contracts
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criteria ticked
Tick the criteria that apply to the company under analysis.
Moats on Euronext Growth small caps
Small caps with a moat on Euronext Growth are often found in these profiles:
- Aerospace / defence subcontractors with lengthy certifications (NADCAP, EN 9100) - years of qualification needed for a new entrant
- Vertical software vendors for specific sectors (funeral management, agricultural logistics, sector-specific HR) - real switching costs
- Value-added technical distributors with recognised expertise - impossible for Amazon to replicate
- B2B recurring-services providers with multi-year contracts and low churn
False moats to avoid
Beware of "moats" that are nothing of the sort: a leadership position in a declining market, a strong brand in a commoditised sector, or a patent expiring in 3 years. A real moat is measured by the predictable durability of the advantage - not by its existence today.
Beware of "moats" that are nothing of the sort: a leadership position in a declining market, a strong brand in a commoditised sector, or a patent expiring in 3 years. A real moat is measured by the predictable durability of the advantage - not by its existence today.
Quality score on Euronext small caps
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The screener's Quality pillar incorporates ROE, ROCE, FCF/NI - the accounting signals of a moat across 800+ stocks.
Frequently asked questions
A moat is a company's ability to protect its profitability against competition over the long run. A company with a moat can maintain high margins even when competitors try to erode its market share.
1) Network effects, 2) Switching costs, 3) Intangible assets (brands, patents), 4) Cost advantage, 5) Efficient scale. The most durable on European small caps are switching costs and regulatory intangible assets.
Look for: ROE > 15% over 5 consecutive years, a stable EBITDA margin even in a slowdown, pricing power visible in the annual reports, stable market share in a defensible niche.
Yes - and it is even more common than among large caps. Small caps with a moat occupy specialised niches: a certified aerospace subcontractor, a vertical ERP vendor, a maker of technical components with patents. These positions are hard to attack and generate high margins for their size.
A temporary advantage lasts 2 to 5 years (copyable technology, first mover with no barriers). A moat lasts 10 years or more because it is structurally hard to attack. The difference shows in the margins: a moat keeps them over time, a temporary advantage sees them erode.