On 1 January 2023, Tufan Erginbilgiç moved into the corner office at Rolls-Royce (LSE:RR.) and, since then, the engineering giant’s shares have gone wild. With the chief exec executing a radical restructuring and turnaround strategy, the company promptly started divesting assets, optimising workflows and, sadly, terminating thousands of roles.
Looking back, this aggressive strategy proved to be genius. The business has evolved from a continuously unprofitable enterprise into a massively lucrative money-printing machine, with free cash flow on track to reach as high as £3.8bn.
Combining this with impressive earnings and revenue momentum, as well as a once dirt cheap share price, it’s no wonder that Rolls-Royce shares took off.
Fun fact: anyone who invested £5,000 on the day Erginbilgiç took over is now sitting on a staggering £60,800, leaving FTSE 100 index investors in the dust.
The question now is, can Rolls-Royce shares continue to outperform?
What’s next for Rolls-Royce?
The main story of the last few years has been the remarkable turnaround of Rolls-Royce’s civil aerospace arm, further supported by defence-driven demand across Europe.
The subsequent explosion in free cash flow generation has not only quelled debt concerns but also paved the way to substantial buybacks, supporting an ever-increasing share price. But while higher defence spending is expected to persist, the largest multi-year growth catalyst resides in a new segment.
In June 2025, Rolls-Royce was selected as the UK’s sole preferred bidder for building small modular reactors (SMRs). And while this novel product is still a few years away, management’s voiced its confidence in making its SMR technology both profitable and free cash flow positive by 2030.
In other words, Rolls-Royce may have only just scratched the surface of its long-term growth potential. But there might be a catch…
Risk versus reward
With such a stellar surge under its belt, Rolls-Royce shares are no longer in deep value territory. In fact, with a forward price-to-earnings ratio of 31.3, the FTSE stock is trading at quite a substantial premium.
In other words, investors have already priced in some of the expected long-term growth from this business in today’s share price. And that might be a major problem if the company doesn’t live up to expectations.
As exciting as SMRs are, it’s important to stress that the technology has yet to prove commercial viability, with only two currently operating in the world, both in Russia.
That means there’s a huge level of execution risk attached to this project, even with the government’s blessing. And even if Rolls-Royce executes perfectly, there remains the challenge of regulatory headwinds that the UK is notorious for – a hurdle that’s led to countless project delays and budget overruns throughout the British nuclear industry.
So where does that leave investors?
The bottom line
Today, Rolls-Royce is a world-class industrials business trading at a premium valuation that reflects its underlying quality. The company’s now preparing to enter into its next chapter of growth within the energy sector.
But if it wants to keep delivering jaw-dropping share price returns, it will have to be even more exceptional than before. And without recovery tailwinds at its back, that’s far easier said than done. That’s why, personally, while I admire the business, this isn’t a stock I’m rushing to buy today.
