Image source: Rolls-Royce plc
The most efficient assignment of all FTSE 100 The index last year was an aeronautical engineer Rolls-Royce (LSE: RR). Flash forward to 2025 and has that massive increase in Rolls-Royce’s share price backfired?
As if.
In fact, Rolls-Royce’s share price has risen so far this year, it is top 93%. Compared to 5% of the FTSE 100 as a whole, that’s an outstanding performance – again.
What drives share price gains
To choose the reasons for this price increase, I think it is useful to consider several different factors.
One is customer demand. After a very difficult period due to travel restrictions imposed by the government and weak consumer demand during the pandemic years, airlines have been struggling to meet the growing demand, which means they have been supplying planes and ordering new ones.
Making aircraft engines is a difficult and expensive business, so there are high barriers to entry. That gives a few dominant players, such as Rolls-Royce, pricing power.
Another aspect has been to operate beyond the civil aviation sector. European governments increased military budgets, aiding Rolls’ defense. Meanwhile its nuclear power technology is increasingly in demand.
But there were internal factors at play. Since the start of last year, the new management has set aggressive growth targets. So far, business performance has been strong. I think, if Rolls-Royce continues to look on track to meet or beat that target, its share price could rise significantly from here.
The current price-to-earnings (P/E) ratio of 21 would look high today (in my opinion, at least). However, if earnings grow significantly – as the company’s strategy suggests is likely – the potential P/E ratio looks to me like it could still be bullish from a long-term investor’s perspective.
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Chances of earning more – but no guarantees
The thing that made me stop investing in Rolls-Royce – and I have no current plans to buy shares – is the other possibility.
For example, what if an ambitious growth plan fails?
Rolls has a history stretching back decades of mixed performance. Look at its roller-coaster earnings per share, for example.
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Its business involves large fixed costs and projects with timelines that can change dramatically due to external factors such as airframe manufacturers pushing back launch dates.
I think the current price of Rolls-Royce shares reflects investors’ hopes that the company will deliver on its plans. So if that doesn’t happen, I expect the share price may go down.
Another important but external factor, too, that Rolls has struggled with for decades is the shock of aircraft demands outside of its control. The pandemic was just the latest in a long line of such shocks, from the terrorist attacks in the US in 2001 to the clouds of volcanic dust that choked European airlines.
I see the risk of such an event reoccurring at some unknown time in the future.
The current price of Rolls-Royce shares does not give me a sufficient margin of safety to compensate for such risks, in my opinion.
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