Rolls-Royce (LSE:RR.) shares remain one of the FTSE 100‘s greatest success stories of recent times. The engineering giant’s soared in value as end markets have rebounded from pandemic lows and restructuring has delivered massive rewards.
Consider how strongly the share price has performed over the last 12 months. At £12.41 per share, it’s more than doubled in value. As a consequence, an investor who bought £15,000 in a year ago would have seen the value of their holdings swell to £30,045.
With dividends thrown in, the total return improves to £30,165.
Expensive, but exceptional
That’s a pretty stunning return. And especially when you compare it to what the broader FTSE 100 — which just enjoyed one of its strongest calendar years on record — has generated. A £15k investment in an index tracker would have delivered a far lower (if still very respectable) £18,360 over the last 12 months.
However you cut it, the shares now look extraordinarily expensive. Its forward price-to-earnings (P/E) is 42.3 times — to put that into perspective, the 10-year average is miles below this, at roughly 15.
But here’s the thing: recent performance means the engineer’s now considered one of the UK’s hottest growth shares. And so investors have been prepared to pay a healthy premium to get exposure to what’s been an impressive turnaround story.
For 2025, it expects underlying operating profit of £3.1bn to £3.2bn, up from £2.5bn the year before. This reflects strong demand across its Civil Aerospace, Defence and Power Systems markets, and improving margins and cash flows due to successful restructuring.
So far, piling into Rolls-Royce has proven highly profitable as its share price has taken off. But past performance isn’t always a reliable guide to future returns. It begs the question: can the FTSE company keep on rising from this point?
Re-rate potential
I’m not so sure, and especially as City analysts expect earnings growth to slow sharply from 2026. It makes me wonder whether the business still deserves the ultra-high P/E ratio of recent times. If the market begins to have similar doubts, Rolls-Royce’s shares could experience a sharp re-rating.
The company is tipped to report a 42% bottom-line increase for last year when results are released on 26 February. However, growth is expected to slow to 14% in 2026, and then again (albeit fractionally) to 13%.
Though the civil aviation industry remain robust, it’s not tipped to grow as rapidly as in recent years, reflecting those weaker growth forecasts. It’s also possible that Rolls’ restructuring efforts begin to yield lesser results from this point on, impacting the bottom line.
It’s also important to ponder the enormous supply chain issues the company faces. These threaten to impact operational delivery and push up costs from 2026, and could — in my view — cause Rolls to miss those mid-teen growth projections.
Bottom line
Rolls-Royce has performed impressively in recent times but that doesn’t mean I want to buy its shares today. I think investors seeking top momentum shares might want to give it serious consideration. But the FTSE firm is far too expensive for my liking.
