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The last five years have been an exceptional period for the Rolls-Royce (LSE:RR.) share price and its shareholders. The once-struggling engineering giant has seen its market cap expand just shy of 1,000% since July 2020. And with the shares climbing by 68% across the first half of 2025 alone, this upward momentum appears to be continuing.
However, such rapid growth is rarely sustainable. And there are growing concerns among analysts that the valuation is starting to get a bit stretched. So, should investors start considering taking profits? Let’s explore.
Lofty valuation
It doesn’t take more than a quick glance at the price-to-earnings ratio to recognise that the Rolls-Royce share price might be getting a bit too big for its britches. The stock is currently trading at an earnings multiple of 33.4. And on a forward basis, that number jumps up to 42.5.
Compared to the wider industry, this premium is getting relatively high, suggesting that years’ worth of future growth expectations are now baked into the share price. To be fair, this premium isn’t entirely undeserved, considering the rapid and massive improvement new management has been able to deliver.
Free cash flow generation is now in the multi-billions, giving ample financial flexibility to repair the over-leveraged balance sheet, bringing debt back under control while also increasing investments into future innovations. At the same time, while unfortunate, rising geopolitical tensions serve as an organic source of demand for its defence-focused operations.
The problem is that with such a rich valuation, any stumble in growth or delay could spark some profit-taking activity, especially among institutional investors. And depending on the scale, that could cause the Rolls-Royce share price to go through a significant amount of downward volatility.
What to do now?
The decision to sell or hold on ultimately depends on individual circumstances and personal risk tolerances. However, if the firm’s recent success has led to a portfolio position growing significantly, it might be prudent to consider a bit of trimming, especially if the position weighting is now in double-digit territory.
This profit-taking move could also provide some spare capital to buy more shares in the future, if the Rolls-Royce share price indeed decides to take a tumble. Having said that, there’s no guarantee this scenario will happen. After all, if the company continues to go from strength to strength, its share price could climb even higher.
At least, that’s what some optimistic analysts are projecting. But overall, the average consensus forecast suggests that Rolls-Royce shares surpassed their fair value at around £9.20. With that in mind, I’m certainly not rushing to buy the shares right now. Instead, I’ll be on the sidelines waiting for either the fundamentals to catch up to the valuation or for the Rolls-Royce share price to fall back in line with the underlying fundamentals.
In other words, Rolls-Royce is staying on my watchlist.
