Will the Rolls-Royce share price rise or sink? 4 important things to consider

I Rolls-Royce (LSE:RR.) share price was one of the FTSE 100great recovery news. It was trading at less than 100p per share less than three years ago. Today its stock is changing hands at £12.82.

Strong end markets and scope restructuring supported its impressive rise. But are Rolls-Royce shares high? Here are four important things to consider before buying an FTSE company today.

1. Civil aerospace capabilities

A strong aviation industry is important to Rolls-Royce. It accounts for about 70% of profits, and has been the backbone of the company’s post-pandemic recovery.

The good news is that analysts are predicting another strong year for airlines. The latest data from the trade body International Air Transport Association (IATA) showed air passenger growth of 5.7% in November, underscoring strong expectations for 2026.

This bodes well for the performance of Rolls’ aftermarket services and engine orders.

2. Supply chain issues

But can aerospace companies benefit from the strength of the airline industry as supply chain problems continue? IATA also said “demand is predicted to outstrip the supply of aircraft and engines” and lasts until 2031 to 2034.

Rolls itself is already feeling the squeeze. The latest trading update for November stated “ongoing supply chain challenges” that in my opinion would threaten product delivery and increase costs.

The current disruption may worsen as the country’s tensions rise. Safran CEO Olivier Andries warned that “supply chain weapons” last week, and specifically in the case of rare earth metals used in aircraft engines.

3. News of SMR

Yet Rolls-Royce is not a one-trick pony. Its aerospace technology is also in high demand in the non-cyclical defense sector. The company is involved in the development of marine engines, battery storage technology, and diesel generators.

I am very excited about the possibility of progress with its small modular reactor (SMR) program following the recent good news.

In September, the company was selected as the Czech Republic’s preferred supplier of these nuclear reactors. It is also in contention to build SMRs for the UK government. More success could help light a fire under Rolls’ share price.

4. Great balance

However, is the positive sentiment about Rolls-Royce’s investment case now fully factored into its share price? There is a good argument in my opinion that its shares now look overpriced at current levels.

Today the FTSE stock’s Forward Price-to-Earnings (P/E) ratio is 39.7 times. To put that in context, the 10-year average for its shares is back at 15.

My fear is not only that this may limit further gains in the share price. A valuation like this could open the door to a sharp correction if the news cycle turns negative and trade news is anything but spectacular.

An important point

And in my view, the likelihood of market conditions worsening is significant enough to be ignored. Supply chain risks are a major threat to engineers. Add in other risks such as economic downturns, product failures, competitive threats, and regulatory hurdles, and I think Rolls-Royce shares are too risky at current prices.

I will not buy an FTSE 100 company in my portfolio. However, it may be worth considering for investors with a higher risk tolerance than me.