Final yr was a superb one for Rolls-Royce (LSE: RR). The aeronautical engineer was the perfect performer on the entire FTSE 100 index. So, have Rolls-Royce shares struggled to take care of momentum on this yr? In no way. To this point in 2024, the share has moved up 84%.

That implies that, having offered for pennies simply a few years in the past, the share has now elevated 121% on a five-year timeframe.

Can issues simply hold getting higher, or is the price trying toppy?

Understanding how to worth firms

Take into account this. Is Rolls actually value 84% greater than it was as lately as January?

Perhaps it’s.

In spite of everything, there may be ongoing proof of monetary turnaround on the firm after a troublesome few years. That’s inspiring traders with confidence that the engineer could obtain its formidable medium-term targets.

Nevertheless, I’ve my doubts. Rather a lot (although not all) of what we see now was already obvious or might be predicted initially of the yr.

Relative to present earnings, Rolls-Royce shares now commerce on a a number of of 20. That’s on the high finish of what I’d sometimes need to pay even for an excellent blue-chip firm.

Nevertheless, I’d not pay that for Rolls, as historical past has proven – from pandemic-era journey restrictions to the aftermath of the 2001 US terrorist assaults – that demand for civil aviation engine gross sales and servicing can instantly drop for causes outdoors the corporate’s management, taking earnings down with it.

No margin for error

Then again, the potential price-to-earnings ratio appears to be like extra enticing if one believes that Rolls can develop its earnings per share in coming years.

That didn’t occur within the first half of this yr, when primary incomes per share truly fell in comparison with the identical interval final yr (although what the corporate phrases underlying earnings per share grew strongly).

The enterprise has been implementing quite a few adjustments designed to enhance its monetary efficiency, from reshaping its portfolio of companies to reducing prices. In its medium-term targets, the main target has primarily been on working revenue and money flows. But when the enterprise can enhance them, then I count on that will even assist elevate earnings per share.

Nonetheless, Rolls-Royce shares appear to me to have come a great distance in anticipation of that taking place. Which means there may be little (or no) margin for error on the corporate’s half.

If it fails to satisfy the expectations totally, I feel the dramatic rise that we’ve seen within the shares over the previous couple of years might begin to unravel.  

Risk of shifting larger

Nevertheless, for now that has not occurred. Actually, if investor enthusiasm stays at its present ranges, I reckon the Rolls-Royce share price would possibly transfer even larger from right here.

As a risk-conscious investor, although, I don’t like the present valuation for a enterprise historical past has proven can face sporadic vital exterior shocks. I’ve no plans to purchase.