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

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.