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The Rolls-Royce (LSE:RR) share price has more than doubled over the past year. That would have turned £20,000 into almost £44,000. That’s the investing dream.
However, this is very unlikely to happen again in 2026. It’s simply a valuation issue. It’s a great company with a lot to be positive about, but a lot of that optimism is already priced in.
Let’s explore why.
Valuation is key
Rolls-Royce’s operational recovery is impressive, but the valuation leaves limited scope for further upside. Based on the figures provided, the shares trade on a forward price-to-earnings multiple of 44.1 times for 2025 and 38.2 times for 2026, using normalised earnings per share of 28.2p and 32.6p, respectively.
Crucially, growth does not appear sufficient to justify this rating. Normalised earnings are expected to grow by roughly 16% between 2025 and 2026, which results in a price-to-earnings-to-growth (PEG) ratio of around 2.8. A ratio at this level typically indicates that growth expectations are already fully reflected in the share price.
Revenue growth remains modest, with a compound annual growth rate of just 2.7% over this year and the next, even as operating margins expand above 20%.
Analysts concur
Honestly, institutional analysts aren’t always the best stock pickers. One of our peer sites actually indicates that Wall Street analysts have underperformed the S&P 500 by around 30% over the past three years.
However, the consensus of their opinions often tells a useful story. Here, the 16 analysts covering the stock have a share price target that’s 4% below the current share price. In other words, they’re suggesting the stock is overvalued.
It’s not all bad
While I actually don’t believe Rolls-Royce is overvalued, I simply don’t see much room for the share price to appreciate unless we get some more good news about the business.
That’s certainly possible, but it’s nothing to bank on. In fact, it makes the investment speculative, unless you know something about the business that isn’t publicly available.
My hunch is if that any new catalyst would have to come from the SMR division. There rest of the business is already performing really well.
It is also worth reiterating that Rolls-Royce is a high-quality business. It operates in structurally attractive markets where it is one of a small number of global players, benefiting from long product cycles, high barriers to entry, and recurring aftermarket revenues.
This gives it pricing power and long-term visibility.
It’s also got a great balance sheet. It currently has a net cash position around £1.1bn. That’s a great turnaround versus three years ago when net debt reached around $5.2bn.
The bottom line
Despite my concerns, I believe Rolls-Royce is still worth considering. £20,000 in a year’s time could be worth £20,500, implying some growth, but a plateauing of the share price. That’s what the figures suggest to me today.
It wouldn’t be my stock of choice going into 2026. I think there’s certainly better value to be found elsewhere. Although, the quality will be hard to match.
