Just how well has Rolls-Royce (LSE: RR) done on the stock market lately? Over the past five years, Rolls-Royce shares have soared 1,187%. But a lot of that reflects a surge early in the period when the company started to move beyond its pandemic-era woes. So, how has it been doing more recently?
Pretty well, is the answer.
So far this year, the Rolls-Royce share price is up by 26%. That is almost three times the wider FTSE 100 Index, which is up by 9% over that period.
Since the start of last year, the aeronautical engineer’s share price is up by 157%.
So somebody who spent £5k on Rolls-Royce shares at the start of 2025 – little over a year and a half ago – would now be sitting on a shareholding worth roughly £12,850.
That is the sort of return many investors dream of. But past performance is not necessarily indicative of what to expect in future.
So, could it be worth me putting some money into Rolls-Royce shares today?
Rolls-Royce has an excellent business and has proven its mettle
Rolls has been around for decades, through every part of the economic cycle.
The business benefits from operating in three distinct but somewhat related fields: civil aviation, defence, and power systems.
That helps to give it some diversification, although, as we saw during the pandemic, a sudden slowdown in the key civil aviation business can hurt the whole company’s performance. That remains a risk, in my view.
With high barriers to entry, a large installed base of engines and systems, and deep technological know-how built over many decades, Rolls is an impressive business.
It has also demonstrated over the past several years that it is able to hit demanding financial targets. To date, it has been able to ride out challenges such as the Middle Eastern war affecting demand for civil aviation.
Indeed, in its interim results last month, it actually raised its performance guidance for the full year.
It now expects to earn £4.7bn-£4.9bn in underlying operating profit and generate £3.8bn-£4.0bn of free cash flow.
That sort of performance helps explain why Rolls-Royce shares have done so well in recent years.
This is the part I do not like
When it comes to successful investing, though, recognising a good business is only part of the challenge. It is also important what price one pays for the shares.
While I like Rolls’ business, its current share price strikes me as too expensive. At 51 times earnings, I do not see any potential margin of safety if I invest.
The share price could move higher from here, though. Clearly it has strong momentum. On top of that, if the business keeps performing well, it could justify a higher valuation.
But my concern is that any slowdown in performance could lead to a sharp price fall given that high valuation relative to earnings.
Whether it is a drop in civil aviation demand, unforeseen delays in development programmes, or shifting energy policies hurting demand for its power systems, Rolls-Royce faces multiple risks I do not think are fully priced in to the share price.
Fortunately, there are other growth shares in the market I see as much more attractively priced.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
