Yahoo Finance Should You Worry About The Madison Square Garden Company’s (NYSE:MSG) ROCE?
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Today we'll look at The Madison Square Garden Company (NYSE:MSG) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Madison Square Garden:
0.0055 = US$17m ÷ (US$3.9b - US$781m) (Based on the trailing twelve months to March 2019.)
Therefore, Madison Square Garden has an ROCE of 0.6%.
Check out our latest analysis for Madison Square Garden
Is Madison Square Garden's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Madison Square Garden's ROCE is meaningfully below the Entertainment industry average of 9.1%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Madison Square Garden stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Madison Square Garden has an ROCE of 0.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Madison Square Garden.
What Are Current Liabilities, And How Do They Affect Madison Square Garden's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Madison Square Garden has total assets of US$3.9b and current liabilities of US$781m. As a result, its current liabilities are equal to approximately 20% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On Madison Square Garden's ROCE
Madison Square Garden has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
