Image source: Rolls-Royce plc
Rolls-Royce (LSE: RR.) shares again broke a new record high above 1,300p on 13 January. But after going up 1,000% and bringing another of the FTSE 100The most compelling narrative of recovery in five years, the aerospace and defense engineer is now facing an important question: can it justify its high valuation in 2026?
Its metrics scream ‘strengthened’ but some industry experts think it could still go higher. I decided to take a closer look at the never-ending story of growth.
Undeniably stellar performance
Rolls-Royce has become the go-to stock when discussing the UK market’s recent resurgence. Having returned 95% in 2025 alone, it has significantly outpaced the FTSE 100’s impressive growth of 21.7%. Now, it is the fourth largest sector in the index by market capitalization (£107.9bn) and has been the main driver of its historic gains of more than 10,000 points.
The stock trades at just under 1,300p since mid-January, representing a 126% return over the past 12 months.
By now, most people already know about the changes of the company under the direction of CEO Tufan Erginbilgiç. Free cash flow reached £1.58bn in H1 2025 alone, already over half of full-year guidance. Revenue increased by 10.7%, operating profit jumped by 51%, alongside an operating margin of 19.1% – these are numbers only a select few UK companies can claim.
Most importantly, it went from half a billion in total debt by 2024 to more than a billion in cash by mid-2025. I haven’t researched the entire story of recovery in the last 50 years but I can say that it is not heard at all.
So where from here?
While the performance is as impressive as it is impressive, the company’s valuation metrics now call for caution. Trading at a forward price-to-earnings (P/E) ratio of 44.1, it looks like an overpriced industrial stock. And its price-to-book (P/B) ratio, at 45.2, is the second highest in the Footsie.
This suggests that much of the current growth narrative is already reflected in the stock price, leaving a limited margin for error. As several analysts have already warned, even a small earnings shortfall could lower the share price. I’ve seen credible forecasts that suggest revenues could drop by 40% by 2026 (before recovering in 2027), so these fears are unfounded.
What does this mean for investors?
What goes up must come down, right? However, another popular saying is, “markets can stay irrational for longer than you can stay in a meltdownThe longer the share price goes up, the more expensive the correction. At this point, it seems pointless to even continue to talk about concerns about the postponement.
At the end of the day, the business is operating at the level it has been capable of for decades, enjoying high demand with a stacked order book. Even if it does dip this year, it probably won’t be a steep fix or a drag out. On a 10 or 20 year timeline, it will probably be a small blur.
So for long-term investors looking to add a more defensive, growth-oriented stock to their portfolio, Rolls remains a top option to consider, in my book.
Not convinced? For those looking for deeper value, our writers recently listed a few non-core FTSE 100 stocks that are also worth checking out.
