A sky-high valuation hasn’t stopped Rolls-Royce‘s (LSE:RR.) share price from rocketing again in 2025. At £11.70 per share, the FTSE 100 company’s shares have risen another 95% since 1 January.
The engineer’s post-pandemic recovery’s been nothing short of incredible. It’s up more than 900% since late 2020.
But could Rolls’ high earnings multiples finally put the brakes on the rally?
38% price rise?
One especially bullish analyst isn’t worried at all, predicting the shares will hit £16.15 by next Christmas. That’s a 38% increase from today’s levels.
That’s a far smaller rise the business has chalked up this year. But it’s a projection that’s not to be sniffed at — combined with predicted dividends, it suggests Rolls-Royce shares could deliver a total return just shy of 40%.
But this is just one of more than a dozen broker forecasts. And of course they can’t all be right. So what can we really expect in the New Year?
Share price drivers
On balance, things look extremely encouraging at the FTSE firm. At civil aerospace, engine flying hours keep rising as do orders of its power units. Continued growth in commercial flying activity might make 2026 another strong year for the core business.
Elsewhere, rising defence budgets bode well for sales to military customers. Finally, the outlook is improving for its small modular reactors (SMRs) as the world pivots from fossil fuels to cleaner sources like nuclear. Data centre growth’s also powering revenues at the Power Systems unit.
Yet for investors, it’s critical to ask how much of this good news is already priced in. By a number of metrics, Rolls shares now look mightily expensive.
I’ve talked about the company’s enormous forward price-to-earnings (P/E) ratio. This is 36 times for 2026, smashing the 10-year average of 17.5.
On shaky ground?
What’s perhaps more alarming is the eye-watering price-to-book (P/B) ratio of 41.1 times. To give that context, any reading above one indicates a share trading above the value of its net assets. I’m sure you’ll agree that’s a whopping premium.
Enormous multiples like these are hard to justify in my view, even considering Rolls’ operational excellence and its strong market conditions. They’re not just a possible obstacle to further share price gains. They might prompt a severe share price retracement on even the slightest sign of weakness.
It’s a scenario investors need to seriously consider in my view. Despite the airline sector’s resilience, things could unwind in 2026 given worsening consumer spending metrics. Supply chains also remain problematic, and subsequent issues — such as product delivery and rising costs — could emerge with a vengeance next year.
There’s also the continual risk that development issues could hit key growth projects. Any issues with its SMR nuclear programme, for instance, might cause market sentiment to sour sharply.
Can Rolls shares rocket again?
So on balance, are Rolls shares worth considering right now? Given how expensive they are today, I won’t buy the stock myself.
However, I was wrong about Rolls-Royce’s share price prospects for this year. And I might have made the wrong call again. The stock could be worth consideration from investors who don’t mind paying a healthy premium.
