Five threats to a company's profits

When investing, it's important to realise that even the most dominant firms can lose their edge and succumb to the competition, says Phil Oakley. Here, he outlines the five forces that influence profitability, and what to look out for before buying shares.

Investing isn't just about numbers. More than 30 years ago, Harvard professor Michael E Porter devised the following 'five forces' framework of industry profitability. Combined, they signal the size of what Warren Buffett once called a firm's "economic moat". The deeper the moat, the stronger the firm and the more likely it is that profits can be sustained. Here are the five forces that influence the strength of a firm's moat.

1. Barriers to entry

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Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.