The Rolls-Royce (LSE: RR.) share price continues to make headlines after its best six-month performance in years, thanks to engine fixes, rising free cash flow and upgraded guidance. But with the stock now flirting with £12, the valuation looks ambitious, and execution will need to follow.
Over the past two years, the shares have surged around 440%, turning the aerospace and defence giant into one of the FTSE 100’s biggest comeback stories. Its market-cap now sits near £95bn — a staggering recovery for a business that just a few years ago was fighting for survival.
Yet, after hitting record highs in late September, the price has begun to cool.
What’s driving it?
The turnaround under CEO Tufan Erginbilgiç has been remarkable. Rolls-Royce’s focus on improving engine durability and reducing maintenance cycles — especially for its Trent 1000 fleet — is paying off. Extending ‘time on wing’ means engines stay in service longer before needing overhaul, cutting downtime and improving profitability.
That matters because Rolls-Royce earns much of its money once its engines are flying, through long-term service contracts and aftermarket parts. More flying hours and fewer shop visits directly translate to higher margins and stronger cash generation.
Its latest half-year results showed exactly that: revenue rose 9.6% to £9.49bn, while earnings soared 147% to £4.42bn. The company achieved a net margin of 29.6% and generated £1.72bn in free cash flow. The balance sheet’s now sitting in net cash, although debt still exceeds equity.
Management even reinstated dividends and launched a £1bn share buyback programme.
Taking a look under the bonnet
Still, no rally lasts forever. The forward price-to-earnings (P/E) ratio’s now overtaken the trailing P/E, hinting that expectations may have run ahead of reality.
Discounted cash flow (DCF) models suggest the stock’s roughly at fair value compared to peers, while analysts’ average 12-month price target of £12.33 implies only a modest 6.8% upside from current levels.
Rolls-Royce is forecasting operating profit of £3.1bn-£3.2bn this year, up from £2.7bn previously. That’s impressive but the valuation already seems to assume flawless delivery.
Even small execution errors could knock sentiment sharply.
Risks to watch
Management’s warned of increased shop visits for its Trent 1000 fleet in the second half of 2025, which could raise costs and drain operating cash. If the rate of engine part replacements exceeds forecasts, those strong margins could come under pressure.
Persistent supply delays and tariffs also remain a threat, particularly with aerospace components still in tight demand globally.
And while the company’s small modular reactor (SMR) unit continues to generate excitement, Rolls recently denied speculation it might spin it off — showing investors shouldn’t count on a short-term cash windfall from that division.
Final thoughts
I think the Rolls-Royce share price has earned its place among the FTSE 100’s most remarkable recovery stories. But with expectations sky-high and the valuation now looking full, I’m not sure further gains will come easily.
For now, I’ll be watching key metrics like free cash flow, engine shop visits and any updates on the SMR programme before deciding whether the stock’s next leg is up or down.
Still, Rolls-Royce remains one of the most fascinating industrial stories on the market and a name any investor may be smart to consider.
