Picture supply: Rolls-Royce plc
Rolls-Royce (LSE:RR.) shares have risen greater than 1,000% over the last 5 years. Up nearly 87% up to now in 2025, too, the FTSE 100 agency’s spectacular bull run is displaying no indicators of slowing.
I can’t assist however really feel, although, that Rolls shares at the moment are wanting unreasonably costly. At £10.98 per share, the engine builder trades on a ahead price-to-earnings (P/E) ratio of 38.2 instances.
Might Rolls’ share worth now be the FTSE‘s most overpriced share? And the place might the inventory be heading subsequent?
Excellent news
Make no mistake: Rolls’ restoration from the depths of the pandemic is nothing in need of unimaginable.
Because the airline trade has recovered, large-engine flying hours have surged, boosting demand for the corporate’s high-margin aftermarket providers, corresponding to upkeep and spare components. This kinds the spine of Rolls’ operations.
However that is solely a part of the story. Its shares have risen as buyers have wholeheartedly purchased into chief govt Tufan Erginbilgiç’s transformation technique.
Contract negotiations, cost-cutting, and effectivity measures all go away Rolls a extra environment friendly, leaner machine than earlier than the pandemic. It’s anticipating underlying working revenue of £3.1bn to £3.2bn this yr — up from £2.5bn in 2024. Free money circulate is anticipated to leap from £2.4bn final yr, to between £3bn and £3.1bn in 2025.
There are good causes to anticipate the enterprise to satisfy these targets and report additional progress subsequent yr. The worldwide journey trade stays largely resilient, whereas the outlook for the defence sector continues to enhance. Rolls can also be making progress with its small modular reactors (SMRs).
Hazard zone?
And be in little question that the corporate faces extreme challenges that might derail market condifence.
In November’s newest replace, Rolls flagged up the “continued supply chain challenges” that might drive costs up, injury its aftermarket providers unit, and hamper mission supply.
This isn’t all. It faces extreme competitors throughout every of its markets, and future contracts are on no account assured. Extra instantly, it might see revenues progress gradual to a crawl if the worldwide economic system weakens, hitting the airline sector and demand for its engine providers.
Right here’s what I’m doing
At at present’s ranges, the corporate’s ahead P/E ratio is greater than thrice the broader FTSE 100 common.
I wouldn’t say that Rolls-Royce’s share worth is the Footsie’s most overvalued enterprise at present. There are many high-priced firms with far poorer funding potential at present.
It might properly proceed to rise in worth. However at at present’s costs, I’m not tempted to purchase the engine builder for my portfolio.
