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Rolls-Royce (LSE:RR) shares have pushed so high that the firm is nearly worth £100bn. That’s an incredible achievement for a company that was worth little more than £6bn three years ago.
I remember the period when there were genuine concerns about the company’s future — I was on my honeymoon. Rolls had been losing cash, was heavily leveraged, and then Liz Truss’s government came in and made borrowing even more expensive.
Little did we know, right then, at the end of 2022, the business was really beginning to improve. Operationally, it was turning a corner, and this would soon be reflected in earnings.
What about the last year?
Well, over the past 12 months Rolls-Royce shares are up 106%. That means £20,000 invested one year ago is currently worth more than £41,000. You’d be hard pushed to find investment returns like that anywhere else — outside of tech — globally.
And, of course, if this investment was made within the Stocks and Shares ISA wrapper, then it would be entirely free of tax. If this investment were made outside of the ISA wrapper, the investor could be in for a hefty capital gains bill when the stock’s sold.
It looks like the threshold for paying capital gains is set to fall again when the Chancellor speaks later this month. This means more of our gains will be taxable.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Still worth investing in?
The stock market can be a pretty dangerous place and investors can easily get drawn into crowded trades. In other words, they see a stock on the rise and then follow other investors into it.
I really like Rolls-Royce and it’s one of my most successful investments of all time. However, I’m starting to wonder if it’s trading close to fair value.
Currently, it trades at 40 times forward earnings. This figure falls to 35 times for 2026. This is expensive versus the FTSE 100, but it’s broadly in line with its most relevant peer, GE.
The balance sheet is also solid with a net cash position around £1.1bn. Obviously that’s only 1% of the market-cap, but it contributes to the overall picture of quality and sustainability.
Diving deeper, the price-to-earnings-to-growth (PEG) ratio currently sits around 2.8. And this is typically a sign that the stock’s overvalued versus projected earnings.
However, it’s important to recognise that the market’s attributing some — only some — value to the company’s leadership in small modular reactors.
All considered however, it’s hard to look further than the near-term valuation. Investing beyond the foreseeable time horizon generates risks than can be hard to justify.
It’s worth considering. And I’m still going to hold it in my portfolio. That said, there could be better opportunities elsewhere.
