Image source: Rolls-Royce plc
Rolls-Royce (LSE: RR.) shares once again smashed a new record high above 1,300p on 13 January. But after soaring 1,000% and delivering one of the FTSE 100‘s most compelling recovery narratives in five years, the aerospace and defence engineer now faces a critical question: can it justify its elevated valuation in 2026?
Its metrics scream ‘overvalued’ but some industry experts think it can still climb higher. I decided to take a closer look at the growth story that just won’t end.
An undeniably stellar performance
Rolls-Royce has become the go-to stock when discussing the UK market’s recent resurgence. Having returned 95% in just 2025 alone, it significantly outpaced the FTSE 100‘s impressive 21.7% growth. Now, it’s the fourth-largest constituent on the index by market capitalisation (£107.9bn) and has become a primary driver of its historic breakthrough above 10,000 points.
The stock’s trading just below 1,300p as of mid-January, representing a 126% return over the past 12 months.
By now, most people know about the company’s transformation under the guidance of CEO Tufan Erginbilgiç. Free cash flow reached £1.58bn in H1 2025 alone, already exceeding half of the full-year guidance. Revenue climbed 10.7%, operating profit jumped 51%, alongside an operating margin of 19.1% — these are numbers only a select few UK companies can claim.
Most significantly, it transitioned from net debt of half a billion in 2024 to net cash of over a billion by mid-2025. I haven’t researched every recovery story in the past 50 years but I’d say that’s fairly unheard of.
So where to from here?
While the performance is as mind-boggling as it is impressive, the company’s valuation metrics now demand caution. Trading at a forward price-to-earnings (P/E) ratio of 44.1, it looks exceptionally high-priced for an industrial stock. And its price-to-book (P/B) ratio, at 45.2, is the second-highest on the Footsie.
This suggests that much of the current growth narrative is already reflected in the share price, leaving limited margin for error. As several analysts have already cautioned, even a mild earnings miss could send the share price tumbling. I’ve seen reliable forecasts that suggest earnings could decline by 40% in 2026 (before recovering in 2027), so these fears are not unfounded.
What does this mean for investors?
What goes up must come down, right? Well, another popular saying is, “markets can remain irrational longer than you can remain solvent“. The longer the parabolic ascent of a share price continues, the louder the calls for a correction become. At this point, it seems irrelevant to even keep parroting concerns about a reversal.
At the end of the day, the business is operating at its most proficient level in decades, enjoying high demand with a stacked order book. Even if it does dip this year, it’s unlikely to be a steep or drawn-out correction. On a 10- or 20-year timeline, it’ll probably be little more than a minor blip.
So for long-term investors looking to add a highly-defensive, growth-orientated stock to their portfolio, Rolls remains a top pick to consider, in my book.
Not convinced? For those seeking deeper value, our writers have recently covered several undervalued FTSE 100 stocks also worth a look.
