Madison Square Garden Entertainment (NYSE:MSGE) Is Doing The Right Things To Multiply Its Share Price

Madison Square Garden Entertainment (NYSE:MSGE) Is Doing The Right Things To Multiply Its Share Price

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So when we looked at Madison Square Garden Entertainment (NYSE:MSGE) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.13 = US$117m ÷ (US$1.4b – US$538m) (Based on the trailing twelve months to December 2023).

So, Madison Square Garden Entertainment has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 11% generated by the Entertainment industry.

View our latest analysis for Madison Square Garden Entertainment

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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’re interested, you can view the analysts predictions in our free analyst report for Madison Square Garden Entertainment .

So How Is Madison Square Garden Entertainment’s ROCE Trending?

Like most people, we’re pleased that Madison Square Garden Entertainment is now generating some pretax earnings. The company was generating losses three years ago, but now it’s turned around, earning 13% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 76% 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. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

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. And with a respectable 18% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 2 warning signs we’ve spotted with Madison Square Garden Entertainment (including 1 which can’t be ignored) .

While Madison Square Garden Entertainment may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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