Image source: Rolls-Royce Holdings plc
Rolls-Royce (LSE:RR.) shares have yet again enjoyed an incredible start to the year, rising by 27%. From the start of 2024, they’re up by 150%. What’s more spectacular is that from January 2023, they’ve risen by a staggering 703%.
If an investor had put £10,000 into the company’s shares at the start of 2023, they’d now have £80,340. But after such a spectacular run-up, is it possible the shares could crash?
Why have Rolls-Royce shares been flying?
If we look at Rolls-Royce’s financial performance, it’s not difficult to see why its shares have increased.
Since CEO Tufan Erginbilgiç took the reins at the start of 2023, the company has impressed on many metrics.
In 2022, the aircraft engine manufacturer generated revenue of £13.5bn with a loss before tax of £1.5bn. In 2024, it generated a profit before tax of £2.2bn on the back of £18.9bn of sales. What a turnaround!
Furthermore, the firm has managed its debt very well. It had net debt of £3.3bn at the end of 2022. It’s now got net cash of £475m.
What I personally like to see in a business is improving margins. This is because it demonstrates that management is running the business with increasing efficiency. Rolls-Royce has performed excellently on this front too. Operating margins have widened from 6.2% in 2022 to 15.4% in 2024.
Analysts are also anticipating the company to continue growing, with revenue growth estimates of 8.3% and 7.9% in 2025 and 2026, respectively.
All of this positive news has fundamentally driven up its share price.
Crash catalysts
So what could cause its shares to crash? Before answering this question, it’s important to assess whether Rolls-Royce’s share price has been pushed up justifiably by putting its valuation into context.
With a price-to-earnings (P/E) ratio of 32 on 2025’s expected earnings, its shares are certainly on the expensive side. However, I don’t believe they’re overly expensive. There’s a case to be made that it deserves a premium for its impressive outlook.
Moreover, based on its current share price, its P/E is expected to fall to 27 based on 2026’s expected earnings, and then to 24 in 2027.
Therefore, I don’t see valuation on its own being able to cause the firm’s shares to crash.
What’s more likely to cause this are events that could harm the company’s business, as investors may then start to question its valuation.
For example, President Trump’s tariffs are a big threat. Its US business accounts for 31% of its sales, so importing components into the country may adversely impact its improving margins.
Also, as prices rise from these tariffs, it could further constrain the cost of living for people, meaning they’re less likely to buy a flight. This reduced demand for flights could translate into less demand for aircraft engines and servicing contracts, which could hurt Rolls-Royce.
With US GDP declining by 0.3% in the first quarter of this year, it may be a signal that we’re heading for this scenario
If sentiment changes on the firm’s outlook as a result of the economy deteriorating, it’s possible the shares could crash but overall, I think Rolls-Royce won’t see a major plunge. Although I don’t believe its shares will deliver the same spectacular returns as before, I believe they’re still worth considering for the long term.
