If I’d invested in Rolls-Royce (LSE: RR.) a 12 months in the past, I’d be a really completely happy man at present. Its share price is up 211% in that point. By comparability, the FTSE 100‘s up 7.4%.

After its tremendous run in 2023, I didn’t count on Rolls to maintain up the tempo. However as an alternative of hitting the brakes, the inventory’s continued to climb. It’s up 57.4% to date in 2024.

However that begs one query. Is the Rolls share price overvalued at £4.69? Let’s discover.

Valuation

I’m going to make use of the price-to-earnings (P/E) ratio to assist me reply that. It’s probably the most frequent valuation metrics on the market.

As seen under, Rolls at the moment trades on a P/E of 16.3. That’s above the Footsie common of 11 and based mostly on that, Rolls appears costly. That mentioned, it’s significantly cheaper than its Footsie peer BAE Methods, which trades on 22.9 instances earnings.

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However what about wanting ahead? Traders are extra involved about the place a inventory has the potential to go versus the place it’s been. Due to this fact, let’s take a look at its ahead P/E.

Because the chart under exhibits, Rolls appears costly. It trades on a ahead P/E of simply above 31. BAE Methods trades on 17.8 instances ahead earnings. The common Footsie ahead P/E is once more round 11. Primarily based on that, Rolls appears like its share price might be overvalued.

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My considerations

That’s my largest concern with the inventory. I’m content material with paying a small premium for Rolls, given the standard of the enterprise. Even so, I’m fearful buyers have pushed the inventory up too excessive too quickly.

Whereas within the short-term, market sentiment can dictate a inventory’s price, in the long term, its fundamentals which are the true development drivers.

Simply preserve rising

Then once more, Rolls might simply preserve rising. There’s lots to recommend that might occur. For instance, its newest buying and selling replace confirmed the agency continues to achieve momentum. Within the first 4 months of the 12 months, giant engine flying hours returned to pre-pandemic ranges.

It’s additionally strengthened its steadiness sheet in current instances. As such, over the previous few months, Fitch, S&P, and Moody’s have all upgraded their credit standing for the corporate. That mentioned, it’s price noting it nonetheless has a web debt of almost £2bn.

The enterprise is focusing on between £2.5bn and £2.8bn in working revenue and between £2.8bn and £3.1bn of free money movement within the medium time period. There’s little question these are bold goals. But when the agency manages to satisfy them, then that might see the inventory soar within the coming years.

My transfer

That mentioned, Rolls is a inventory I plan to maintain on my watchlist in the interim. I’m cautious that any signal of a slowdown in development might see its share price tumble. I’m nervous some buyers might have gotten carried away.

If we see its share price pull again, that’s after I’ll strongly contemplate making a transfer. Till then, I’ll be holding off. It’s set to launch its half-year outcomes for 2024 in August, so I’ll be conserving an in depth eye.