Why Gungho Online Entertainment Inc (TYO:3765) will appeal to moat investors

There's an exclusive group of companies in the stock market that stand out because they've got what billionaire investor Warren Buffett calls economic moats. Like medieval castles, their profits are fortified by impregnable business models... and there are signs that Gungho Online Entertainment Inc (TYO:3765) might be one of them.

Given the present disruption and volatility in the stock market, it is more important than ever to identify high-quality stocks for your portfolio - and finding companies with moats is one way to do it.

Moats come in different forms, but they mostly consist of:

• Intangible Assets - Such as brands that customers love, valuable patents or regulatory approvals

• High switching Costs - It might be too costly, complicated or unnecessary for customers to look elsewhere

• Network Effects - When customers become part of a product it creates tremendously powerful businesses

• Cost Advantages - Superior processes and unique locations and assets make it hard for others to compete

• Great Scale - Large infrastructure and distribution networks are powerful barriers to entry in many industries

Here's a quick guide to finding the clues to economic moats - using Gungho Online Entertainment Inc (TYO:3765) as an example...

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Gungho Online Entertainment Inc (TYO:3765)'s impressive metrics

Some of the biggest indicators of a moat involve persistent strong margins and high levels of cash generation – cash being especially important given the recent shocks to the worldwide economy. Here are a few ways of gauging these characteristics - and how Gungho Online Entertainment Inc compares:

1. High rates of Free Cash Flow - the measure of a thriving company.
   - A high ratio of free cash flow to sales can be a very positive sign. For Gungho Online Entertainment Inc, the figure is an impressive 22.9%.

2. High Return on Capital Employed - the measure of a company growing efficiently and profitably.
   - A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Gungho Online Entertainment Inc, the figure is an eye-catching 58.7%.

3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
   - Gungho Online Entertainment Inc has a 5-year average ROE of 35.2%.

4. High Operating Margins (compared to peers) - the measure of a company with pricing power
   - Gungho Online Entertainment Inc has a 5-year average operating margin of 34.9%.

Next steps

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But it's important to do your own research and dig into the numbers yourself...

To find out more you might want to take a look at the TYO:3765 StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.

To find more stocks with moat-like characteristics, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Moats - which gives you everything you need. So why not come and take a look?