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The Rolls-Royce Holdings (LSE: RR.) share price has gained a staggering 2,078% over the past five years.
But what’s more impressive are the fundamental numbers driving it all. And there’s more than just a recovery from the pandemic crash behind them.
Then and now
I’ve been having a look at 2019 full-year results — the last before Covid. At the time, Rolls was having a bit of a wobble, with its earlier share price rise heading into reverse.
I’m also casting my eye over 2024 results, which is the most recent full year we have.
One thing immediately strikes me. Revenue in the two years wasn’t miles apart. Back in 2019, Rolls reported underlying revenue of £15,450m. Forward to 2024 and we see £17,848m in underlying revenue. That’s a modest 16% increase over five years.
But 2024 was the first year since the slump that Rolls-Royce managed to beat its 2019 result. A year previously in 2023, we saw £15,409m — just a fraction short of drawing level.
Not all equal
In 2019, Rolls managed to extract £808m in underlying operating profit from its £15,450m revenue. And the company reported that as a 5.3% operating margin.
In 2024, that top-line £17,848m revenue figure produced a £2,464m operating profit, for a much fatter 13.8% margin.
Free cash flow went from £873m in 2019, to £2,425m in 2024. That’s a 2.8-fold rise. Compared to what things looked like in 2019, Rolls-Royce Holdings last year had ‘cash cow’ stamped all over it. And if we look forward, things get even better.
Rolls had £475m net cash in 2024, still a fair bit down on 2019’s £1,361m. But forecasters expect it to climb to £1,920m in 2015, £4,264m in 2026… and a stunning £7,025m by 2027.
Unmissable?
The way Rolls has turned itself from mediocrity into a cash flow monster — that’s what’s blown my socks off. But I’m not going to buy right now. And it’s because of that ‘V’ word that growth investors often fear to utter: valuation. There, I’ve said it.
Forecast price-to-earnings (P/E) ratios of 45 for this year and 37 next might not seem too high, not for a growth stock these days. I’m just not sure the expected earnings growth rate is enough to support them.
Forecasts suggest a 21% rise in earnings per share (EPS) in 2026, and then 13% the year after. If we compare the P/E to EPS growth we get what’s called the PEG ratio, with anything under 1.0 traditionally attracting attention.
At Rolls, we have a PEG of 1.8 on 2026 forecasts, and 2.5 for 2027. Not only is that a bit big, it’s also rising rather than falling.
Jam tomorrow
This is all based in things we can quantitatively predict, at least to some extent. And the Rolls-Royce share price valuation is surely boosted by hopes of coming decades of small nuclear reactor domination. But hopes are harder to get into a spreadsheet.
I do see a very good chance of those hopes coming good, and those who invest now might do very well. But the reason I’m steering clear is that I won’t buy what I can’t count.
