Over the last five years, few UK shares have come close to delivering the explosive returns of Rolls-Royce (LSE:RR.) shares. The once-struggling engineering enterprise has delivered a remarkable turnaround that not only saved the business from bankruptcy but also pushed its market-cap to record highs.
Investors who saw its recovery potential and placed big bets have gone on to earn phenomenal returns. In fact, when including the extra gains from recently reinstated dividends, the total return since September 2020 now stands at 1,763%.
In terms of money, a £1,000 initial investment would now be worth £18,630. And wealthy investors who went all in with £100,000 now have over £1.8m!
Of course, with such enormous growth under its belt, the question now becomes, can Rolls-Royce shares continue to climb higher?
What’s next for Rolls-Royce shares?
Looking across the latest projections from institutional analysts, it seems that most expect Rolls-Royce shares to continue moving upward over the next 12 months. The rise of European defence spending has created some welcome short- and medium-term tailwinds. At the same time, the strong recovery in civil aerospace has led to a rise in commercial aircraft production – another tailwind Rolls-Royce is capitalising on.
The impact of these growth catalysts is only being amplified by the continued streamlining of operations, paving the way for superior profit margins and free cash flow generation. The latter’s particularly important since it’s what enables management to continue tackling the firm’s outstanding debts & equivalents.
| Year | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 H1 |
| Cash & Equivalents (£m) | 3,309 | 2,540 | 2,383 | 3,505 | 5,330 | 6,044 |
| Debt & Equivalents (£m) | 7,330 | 7,776 | 5,955 | 5,759 | 5,132 | 4,909 |
Combining this with positive momentum in the group’s power systems segments means that 12 out of the 17 experts following this business now have the shares rated as a Buy or Outperform. And while there’s a broad range of opinions as to where the stock might go next, the average price target currently stands at 1,240p – roughly 10% higher than where the stock trades today.
Taking a step back
Despite the optimism, even bullish analysts recognise that Rolls-Royce continues to face some notable risks. The ramp-up of aircraft construction might ultimately be short-lived if tariffs wreak havoc on supply chains. And this impact may only be compounded by rising geopolitical tensions.
At the same time, while ongoing restructuring efforts are helping to reduce operating costs, they also come paired with significant execution risk. Aggressively reducing headcounts and making budget cuts runs the risk of disrupting key projects and production lines that might take time to later fix.
Throw in the continued pressure of outstanding financial leverage, and management might find itself with limited flexibility, especially if the macroeconomic environment deteriorates.
The bottom line
Rolls-Royce and its shares are in a much stronger position today compared to 2020. And all things considered, I remain cautiously optimistic about what’s on the horizon for this enterprise. Yet at the same time, other aerospace & defence stocks could potentially offer superior gains. That’s why I’m looking at other opportunities within this sector.
