To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Madison Square Garden Entertainment (NYSE:MSGE) so let's look a bit deeper.

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Understanding 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. The formula for this calculation on Madison Square Garden Entertainment is:

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

0.12 = US$130m ÷ (US$1.6b - US$502m) (Based on the trailing twelve months to December 2024).

So, Madison Square Garden Entertainment has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Entertainment industry.

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

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 70% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

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 32% 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.

In Conclusion...

In summary, it's great to see that Madison Square Garden Entertainment has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 17% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Madison Square Garden Entertainment does have some risks though, and we've spotted 2 warning signs for Madison Square Garden Entertainment that you might be interested in.

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.