When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Persimmon (LON:PSN) we aren't filled with optimism, but let's investigate further.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Persimmon is:

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

0.10 = UK£396m ÷ (UK£4.8b - UK£923m) (Based on the trailing twelve months to December 2024).

Thus, Persimmon has an ROCE of 10%.  In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 9.0%.

See our latest analysis for Persimmon LSE:PSN Return on Capital Employed August 5th 2025

In the above chart we have measured Persimmon's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Persimmon  for free.

What Does the ROCE Trend For Persimmon Tell Us?

We are a bit worried about the trend of returns on capital at Persimmon. To be more specific, the ROCE was 29% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Persimmon to turn into a multi-bagger.

Our Take On Persimmon's ROCE

In summary, it's unfortunate that Persimmon is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Story Continues

On a separate note, we've found  1 warning sign for Persimmon  you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive 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.

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