Returns On Capital Are Showing Encouraging Signs At Madison Square Garden Entertainment (NYSE:MSGE)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Madison Square Garden Entertainment's (NYSE:MSGE) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Madison Square Garden Entertainment:

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

0.12 = US$108m ÷ (US$1.5b - US$551m) (Based on the trailing twelve months to March 2024).

So, Madison Square Garden Entertainment has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

View our latest analysis for Madison Square Garden Entertainment

In the above chart we have measured Madison Square Garden Entertainment's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Madison Square Garden Entertainment .

The Trend Of ROCE

Like most people, we're pleased that Madison Square Garden Entertainment is now generating some pretax earnings. 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 63% less capital than it was three 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. Effectively this means that suppliers or short-term creditors are now funding 38% of the business, which is more than it was three years ago. 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.

The Bottom Line On Madison Square Garden Entertainment's ROCE

From what we've seen above, Madison Square Garden Entertainment has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 8.4% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Madison Square Garden Entertainment, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

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