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Rolls-Royce (LSE:RR) shares have given us one of the most remarkable investing stories over the past two years. Its share price has surged from the lows of 2022 to all-time highs in 2025. Investors are now asking can Rolls-Royce shares reach the psychologically significant £10 mark? And if so, when?
Valuation still ok
Fundamentally, Rolls-Royce is in a much stronger position than in previous years. However, its valuation has become stretched by historical and sector standards. The forward price-to-earnings (P/E) ratio for 2025 stands at 34.8 times, falling to 28 for 2026. These are well above the industrial sector median of 19.6 and 21.8 respectively, but lower than General Electric (GE), which is widely seen as a comparable peer.
The premium versus the rest of the industrials sector is more pronounced when looking at the price-to-earnings-to-growth (PEG) ratio, which stands at 2.47 for 2025. Again, well above the sector average.
On an EV-to-EBITDA basis, Rolls-Royce trades at 19.6 times on a forward basis, compared to a sector median of 11.5, and its price-to-sales ratio’s more than double the sector average. These figures suggest that much of the good news is already reflected in the share price, and the market’s pricing in continued strong earnings growth and margin expansion.
It’s not just any old company
Rolls-Royce might look expensive, but in reality it’s quite unique. It’s a true quality company with an impressive economic moat and expanding margins. What’s more, it’s growing earnings at an outstanding rate. Earnings per share are expected to grow by 48.6% in 2025 and a further 24% in 2026, which helps to justify some of the premium.
However, the company’s dividend yield remains modest, with consensus forecasts for 2026 suggesting a payout of around 9.7p, equating to a yield of just over 1% at current prices. This is well below the FTSE 100 average, and for income investors, Rolls-Royce is unlikely to be a primary choice.
The bottom line
Investors may point to the circa 20% P/E discount to GE as a reason this firm should trade higher. But the two companies are currently tied on the PEG ratio. However, I’d suggest the valuation’s pretty much perfect right now.
That’s not to say the company could trade higher, but it would be very hard to predict. That’s because I’d suggest that any share price growth would need to come from earnings beats or more positive news around its small modular reactor (SMR) programme.
Analyst targets for the next 12 months now range from 850p to as high as 1,150p, with Bank of America at the top end, citing management’s free cash flow ambitions and the prospect of further dividend growth.
Personally, I’m sitting tight on my Rolls-Royce shares. They’ve performed extremely well for me in recent years. On the industrials front, I’m starting to wonder if British aerospace manufacturer Melrose Industries could be better value and offer more potential. Investors may want to consider this instead for a stronger value play.
