To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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.

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

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$126m ÷ (US$1.6b - US$506m) (Based on the trailing twelve months to June 2024).

So, Madison Square Garden Entertainment has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% 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'd like, you can check out the forecasts from the analysts covering Madison Square Garden Entertainment for free.

What Can We Tell From Madison Square Garden Entertainment's ROCE Trend?

Shareholders will be relieved that Madison Square Garden Entertainment has broken into profitability. The company now earns 12% on its capital, because three years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

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

In summary, we're delighted to see that Madison Square Garden Entertainment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 39% 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.