Over the past five years, the FTSE 100 aeronautical engineer Rolls-Royce (LSE: RR.) has put in a spectacular stock market performance. During that time, the FTSE 100 index has moved up by 49%. That already strikes me as an attractive return (with dividends on top) – but it is dwarfed by the 1,385% growth achieved by Rolls-Royce shares over the same period.
Someone who invested £10k in the share five years ago would now be sitting on a holding worth around £148,500.
They would also be earning around £1,000 per year in dividends. The current yield is only 0.7%, but having bought at a far lower price, a long-term investor could accordingly now be earning a much higher yield.
What about now, though? If I was to buy some Rolls-Royce shares today, where might I be in five years?
Same again, please?
It is easy to dream that another 1,385% in the coming five years could produce similar results.
On one hand, past performance is not necessarily a guide to what will happen in future.
On the other hand though, Rolls-Royce shares have been among the FTSE 100’s top performers time after time in recent years. So far in 2026, the share is already up 16%, over three times as strong a performance as the index overall.
But the company’s market capitalisation is now £116bn, the fourth-biggest on the London stock market. Rolls-Royce shares sell for 48 times earnings.
Although the business is doing well, has ambitious growth plans and is benefitting from demand growth in its key markets, I think it is unlikely that the share price will perform in the coming five years anything like as well as it has in the past five.
Still, if momentum remains strong and the business keeps delivering, I do think the share price could potentially move higher from here.
Could things get worse, not better?
That price-to-earnings (P/E) ratio of 48 alarms me. That is well over double the current FTSE 100 P/E ratio of 18.
There is arguably some justification for that premium. Rolls has been benefitting not only from robust demand growth but also from its own cost management and consistent ability to deliver on its targets.
Still, a P/E ratio of 48 looks high to me. It is twice that of fellow UK defence contractor Babcock, for example.
If there is an upset such as Rolls not meeting its goals, or a demand shock pushing down customers’ willingness to spend on new civil aviation engines or servicing of existing ones, I think that risks pushing the Rolls-Royce share price downwards.
As a long-term investor, I see that as a credible possibility. It explains why I am not buying Rolls-Royce shares at the current price.
More modest growth, but still growth
That is because, as an investor, I like to have a margin of safety.
Still, I recognise the possibility that in the coming five years, ongoing business momentum could push Rolls-Royce shares upwards, making them worth a closer look.
But while I see the opportunity for further growth, I also see risks such as an external shock hitting civil aviation demand. To my mind, even the current valuation does not properly reflect such risks.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
