£20,000 invested in Rolls-Royce (LSE: RR) shares when Tufan Erginbilgiç became CEO in 2023 would be worth £245,694 today, including dividends.
This extraordinary transformation was powered by one of the most aggressive corporate resets the FTSE 100 has seen in years. And after the 12‑fold rerating, the shares have finally paused for breath.
But the business is now delivering higher margins, stronger cash flow and clearer long-term targets. So is now the right time for me to buy more of the stock on this rare share price dip?
Outstanding recent results
Rolls‑Royce delivered another stunning year in 2025, with underlying operating profit rising 41% year on year to £3.5bn. This underlined the impact of its transformation programme, focused on efficiency, simplification, and sharper commercial discipline.
Free cash flow surged 38% to £3.3bn, highlighting the enduring strength of its long‑term service agreements. These involve airlines paying Rolls‑Royce for engine servicing over many years, and it means steady, recurring cash flows for the firm every time its engines are flying.
Meanwhile, net cash soared 299% to £1.9bn, illustrating how far the balance sheet has been strengthened as profitability and cash generation accelerate.
Even stronger momentum ahead?
One risk to Rolls-Royce is any major failure in one of its key products which could be costly to fix. Another is the high degree of competition in its core business areas, which may squeeze its margins over time.
Even so, the firm’s management expects underlying operating profit to rise again in 2026 to £4bn-£4.2bn, with free cash flow of £3.6bn-£3.8bn. And it has upgraded its medium‑term targets to an underlying profit of £4.9bn-£5.2bn, free cash flow of £5bn-£5.3bn and return on capital of 23%-26%.
Crucially, several major long‑term growth drivers are now coming into view. Rolls‑Royce is expanding its global maintenance network, including new capacity in Beijing. This China addition alone will support up to 250 Trent engine overhauls a year by the mid‑2030s.
It also secured a commitment from ČEZ Group for up to six small modular reactors (SMRs). Industry forecasts are that the SMR market will reach $295bn (£222bn) by 2043 — a 30% compound annual growth rate.
And defence growth has been reinforced by contracts worth £1.5bn with the UK Ministry of Defence and US Department of War. These will run alongside programmes for the MV-75 future long-range assault aircraft and the B-52 heavy bomber.
My investment view
Despite Rolls-Royce’s recent share price gains, it still looks undervalued to its peers. On the key price-to-earnings measure, it trades at 16.1 — bottom of its peer group, which averages 32.5. These firms comprise Northrop Grumman at 23.2, BAE Systems at 31.9, TransDigm at 36.2 and RTX at 38.6.
Given its new performance guidance, analysts forecast that Rolls-Royce’s return on equity will be a stunning 109% by end-2028. This highlights a business capable of generating exceptional returns on its capital. It is the kind of return normally associated with elite companies — which investment-grade Rolls-Royce now is — priced at very high levels, not one trading at the lowest valuation in its sector.
Alongside this, the company announced a further £7bn-£9bn in share buybacks for 2026-2028. These tend to support share price gains.
Together, these factors look compelling to me, and I will buy more of the stock very soon.
