At the start of the year, there was a lot of hype around the Rolls-Royce (LSE:RR) share price. After all, Rolls-Royce stock had doubled in value during 2024. So if an investor had decided to step in and buy £2k worth of the stock in January, here’s what it would currently look like.
Smiles all round
Back at the start of January, the share price was 569p. At the moment, it’s at 1,181p. This represents a 107% return in less than a year. Therefore, the £2k would now be worth £4,140. Of course, this profit is unrealised, it’ll only be banked as cash when the investor decides to sell. However, even unrealised, it’s still a tremendous return.
By comparison, the FTSE 100’s up 12% year-to-date. Considering this is an index made up of a host of large-cap companies, 12% is also an above-average performance. Yet it’s clear Rolls-Royce has wiped the floor with any passive investors who decided to buy a tracker index.
Reasons for the gain
The stock has benefited from the continued progress manifested under CEO Tufan Erginbilgic. The 2024 full-year results saw an increase in revenue and a 57% bump in underlying operating profit. The first half of 2025 continued this trend with strong strategic delivery and an increased financial guidance for the full year.
The company’s also dramatically reduced its net debt. If we rewind to the early stages of the pandemic, the business had to take on high levels of debt in order to survive, given the lack of aircraft maintenance needed due to travel restrictions. Thanks to a world now back to normal, Rolls-Royce has cut its debt levels. This gives investors more confidence in the firm’s long-term sustainability.
Finally, Rolls-Royce is benefitting from increased defence spending (both in the UK and abroad). Also, a major policy push with UK government backing for small modular reactors (SMRs) and nuclear energy more broadly is adding to investor optimism.
Moderating enthusiasm
The stock performance has been exceptional, but it can’t keep doubling in value every year. Apart from just the difficulty in continuing to scale at such a rapid pace, there are risks on the horizon.
For example, the business continues to suffer from supply chain bottlenecks for parts and specialised materials. Delays in engine or parts deliveries can reduce revenues, with some issues not easy to resolve quickly.
Valuation’s another concern. With a price-to-earnings ratio of 57, it’s over triple the average of the FTSE 100 as a whole. To me, this is a clear warning flag that it could be overvalued in the short term.
Therefore, although an investor would have done very well buying the stock in January, I’m not sure this pace of gains can be sustained. I think investors should consider growth stocks that trade at more reasonable valuations.
