How much are Rolls-Royce shares really worth as we approach 2025?

After starting the year at 300p, Rolls-Royce shares have climbed to 540p. But are they really worth that much? Edward Sheldon crunches the numbers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Caucasian man making doubtful face at camera

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rolls-Royce (LSE: RR.) shares are hot right now. This year, they’ve risen from 300p to 540p – a gain of 80% – on the back of investor excitement.

But how much are the shares really worth as we head towards 2025? Let’s take a look.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALL6 Apr 20203 Apr 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '25202120212022202220232023202420242025202502505007501000www.fool.co.uk

The right price

There are a number of ways to try and work out a company’s ‘intrinsic’ value (how much it’s really worth). But no method’s foolproof – they all involve making some assumptions.

Should you invest £1,000 in Alliance Witan right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Alliance Witan made the list?

See the 6 stocks

One method is to assign an earnings multiple to the near-term earnings per share (EPS) forecast. Given the market’s focus on price-to-earnings (P/E) ratios, this method can make sense.

The problem is it’s hard to know exactly what multiple to use. It’s very subjective. Personally, I feel that a P/E ratio of 20 is about right for Rolls-Royce as it’s an industrial company with a high level of capital expenditures. Given that the EPS forecast for 2025 is 21p, that gives us a price of 420p.

That earnings multiple could be too low however. It seems City analysts believe the shares are worth a higher multiple. Currently, the average price target among the analyst community is 550p, according to my data provider.

That would put the P/E ratio at 26 though. And for me, that’s too high – that’s a tech stock valuation!

Crunching the numbers

Another approach to determining intrinsic value is what’s known as a discounted cash flow (DCF) analysis. This involves forecasting a company’s future free cash flows, ‘discounting’ them to a present value today using a certain interest rate, and then adding them all up.

This strategy’s commonly used by professional investors. Again though, there’s a lot of guesswork involved. With this type of analysis, investors need to forecast future free cash flows and growth rates and then determine an appropriate discount rate. So there’s a lot that can go wrong.

But we can have a go. Currently, Rolls-Royce is expecting to generate free cash flow of £2.1bn-£2.2bn this year. Let’s say that it achieves £2.2bn and then grows this by 15% for the next five years before growth slows to 5% a year for the next decade.

And let’s say that 10%’s the right interest rate to discount future cash flows back to present day values. In this scenario, we get an intrinsic value of about 400p. That’s about 25% below the current share price.

My forecasts may be too pessimistic however. If I increase the cash flow growth rates, the intrinsic value estimate rises.

Better shares to buy?

In summary, it’s hard to know what Rolls-Royce shares are really worth. Ultimately, it depends on the valuation approach used and the assumptions made.

Personally, I think the shares are a little overvalued at current levels. That’s why I’m focusing on other opportunities in the market right now.

Should you buy Alliance Witan now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »