Image source: Rolls-Royce plc
The Rolls-Royce (LSE:RR) share price is up a remarkable 71% over 12 months. In fact, the stock’s rebirth has been truly incredible over the past three years. Surging more than 1,000% from the nadir, Rolls-Royce is now one of the largest companies on the FTSE 100, with a market cap around £60bn.
But what’s happened to its valuation over the period? Let’s take a closer look.
It’s a little mixed
Starting with the price-to-earnings (P/E) ratio, we can see that Rolls-Royce shares have gradually become more expensive over the past year. The data prior to 2023 isn’t that useful because Rolls-Royce really struggled during the pandemic, and it was either loss-making or had to sell business units to cover costs. Data since mid-2023 suggests that the stock’s rise has broadly outpaced trailing earnings.
Price-to-sales (P/S) data also confirms this trend. Over the past five years, we can see that investors have become increasingly willing to pay more for each pound of sales. Having traded around 0.5 times P/S, the business is now more than 600% more expensive. That’s certainly something to bear in mind, although earnings are the key metric, not sales.
This data tells me that Rolls-Royce stock is more expensive on a historical basis. However, that doesn’t give us the whole picture. Earnings growth is forecasted to average around 15% over the medium term. This is impressive, but leads to a P/E-to-growth (PEG) ratio of two times. That’s a 35% premium versus the industrial sector global average.
What’s more, Rolls-Royce isn’t just an industrials stock, it’s a company with a really strong economic moat. In other words, it’s doesn’t often face new competition in its primary sections like building aircraft engines and submarine propulsion systems. With that in mind, it’s more appropriate to compare it with peers like GE.
GE’s P/E ratio is high: 37.5 times (trailing 12-month period, or TTM), and the company’s expected growth is similar to Rolls-Royce. What’s more, its price-to-sales (P/S) ratio is 5.3 times (TTM), also elevated. While US stocks typically trade at a premium to their UK counterparts, it also suggests Rolls is not overvalued.
The bottom line
Sometime the numbers aren’t everything, so let’s take a closer look at the business. Rolls-Royce is capitalising on strong demand in civil aerospace and defence, with engine flying hours surpassing pre-pandemic levels and robust growth in service revenues.
Aggressive transformation under CEO Tufan Erginbilgiç has delivered higher margins, strong cash flow, and a return to net cash, enabling dividend reinstatement and a £1bn share buyback programme. Upgraded mid-term targets reflect confidence in continued operational improvements and market share gains.
However, persistent supply chain challenges, including parts shortages and cost inflation, are expected to impact cash flow by £150m–£200m in 2025 and may disrupt deliveries. The civil aerospace sector’s inherent volatility, reliance on long-haul travel, and potential technical issues could threaten earnings stability.
Finally, while the balance sheet is much stronger, unexpected shocks or aggressive shareholder returns could slow deleveraging. Overall, Rolls-Royce’s outlook is bright, but execution risks remain. Personally, I’m not adding to my position right now as I believe there could be more clearly undervalued stocks available.
