Madison Square Garden Entertainment (NYSE:MSGE) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Madison Square Garden Entertainment (NYSE:MSGE) looks quite promising in regards to its trends of return on capital.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Madison Square Garden Entertainment, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = US$148m ÷ (US$1.7b - US$538m) (Based on the trailing twelve months to March 2025).

Therefore, Madison Square Garden Entertainment has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Entertainment industry.

Check out our latest analysis for Madison Square Garden Entertainment

Above you can see how the current ROCE for Madison Square Garden Entertainment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Madison Square Garden Entertainment for free.

What Does the ROCE Trend For Madison Square Garden Entertainment Tell Us?

We're delighted to see that Madison Square Garden Entertainment is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 12% on their capital employed. Additionally, the business is utilizing 51% less capital than it was four years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Madison Square Garden Entertainment could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 31% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Madison Square Garden Entertainment's ROCE

In the end, Madison Square Garden Entertainment has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 4.6% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you'd like to know about the risks facing Madison Square Garden Entertainment, we've discovered 2 warning signs that you should be aware of.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.