Return on invested capital is after-tax operating profit divided by the capital put into the business. It answers: how much does the company produce per dollar committed. Consistently above 15% is a strong sign of a real advantage. Below its cost of capital, the company is destroying value with every dollar it invests — even while reporting a profit.

There's also return on equity, better known and more misleading: it can be inflated simply by taking on debt. So always read it alongside leverage, and when a company is heavily levered, prefer the first metric.

High returns attract competitors. If nothing stops them entering, the profitability erodes within a few years. A "moat" is exactly that something: a network effect where each new user raises the value for everyone, high switching costs that make leaving expensive, a brand that supports higher prices, a structural cost advantage, or regulation and licensing that block entry.

The practical test is historical rather than narrative: has the company held a high return for five to ten years? An advantage that survives real competition over time is a moat. One that vanishes after two years was a new-product advantage, not a structural one.

Two numbers usually suffice. Leverage: net debt divided by operating profit before depreciation — above 3 the company is rate-sensitive, above 5 it's risky. Interest coverage: operating profit divided by interest expense — under 3 there's a problem. And beyond both, check when the debt matures: a healthy company with a large repayment due next year and no cash is an entirely different story.