Image source: Rolls-Royce plc
Rolls-Royce (LSE:RR.) shares have risen more than 1,000% during the last five years. Up almost 87% so far in 2025, too, the FTSE 100 firm’s spectacular bull run is showing no signs of slowing.
I can’t help but feel, though, that Rolls shares are now looking unreasonably expensive. At £10.98 per share, the engine builder trades on a forward price-to-earnings (P/E) ratio of 38.2 times.
At these levels, there’s a chance the company’s shares could struggle to rise further. Furthermore, a chunky valuation like this may prompt a sharp price correction if the broader stock market falls or news flow begins to underwhelm.
Could Rolls’ share price now be the FTSE‘s most overpriced share? And where could the stock be heading next?
Good news
Make no mistake: Rolls’ recovery from the depths of the pandemic is nothing short of incredible.
As the airline industry has recovered, large-engine flying hours have surged, boosting demand for the company’s high-margin aftermarket services, such as maintenance and spare parts. This forms the backbone of Rolls’ operations.
But this is only part of the story. Its shares have risen as investors have wholeheartedly bought into chief executive Tufan Erginbilgiç’s transformation strategy.
Contract negotiations, cost-cutting, and efficiency measures all leave Rolls a more efficient, leaner machine than before the pandemic. It’s expecting underlying operating profit of £3.1bn to £3.2bn this year — up from £2.5bn in 2024. Free cash flow is expected to jump from £2.4bn last year, to between £3bn and £3.1bn in 2025.
There are good reasons to expect the business to meet these targets and report further progress next year. The global travel industry remains largely resilient, while the outlook for the defence sector continues to improve. Rolls is also making progress with its small modular reactors (SMRs).
Danger zone?
Investors have grown accustomed to constant good news from Rolls. And my fear is that this could create a problem later on. Any disappointment could puncture that sense of invincibility around the company, and trigger a sharp pullback in the shares.
And be in no doubt that the company faces severe challenges that could derail market condifence.
In November’s latest update, Rolls flagged up the “continued supply chain challenges” that could drive prices up, damage its aftermarket services unit, and hamper project delivery.
This isn’t all. It faces severe competition across each of its markets, and future contracts are by no means guaranteed. More immediately, it could see revenues growth slow to a crawl if the global economy weakens, hitting the airline sector and demand for its engine services.
Here’s what I’m doing
At today’s levels, the company’s forward P/E ratio is more than three times the broader FTSE 100 average.
I wouldn’t say that Rolls-Royce’s share price is the Footsie’s most overvalued business today. There are plenty of high-priced companies with far poorer investment potential today.
It could well continue to rise in value. But at today’s prices, I’m not tempted to buy the engine builder for my portfolio.
