Rolls-Royce (LSE: RR.) has delivered one of the most remarkable stock market performances seen on the FTSE 100 in recent memory, gaining 1,385% over the past five years.
To put that into perspective, the FTSE 100 index itself rose by 49% over the same period, a return many investors would consider attractive even before dividends are factored in.
An investor who put £10,000 into Rolls-Royce shares five years ago would now be sitting on a holding worth approximately £148,500, a life-changing gain by any measure.
That same investor would also be earning around £1,000 per year in dividends, despite the current yield standing at just 0.7% on today’s share price.
The yield looks modest in isolation, but for those who bought in at much lower prices, the effective yield on their original investment is considerably more generous.
So far in 2026, Rolls-Royce shares are already up 16%, more than three times the performance of the wider FTSE 100 index over the same period.
The company’s market capitalisation now stands at £116 billion, making it the fourth-largest company listed on the London stock market by that measure.
Rolls-Royce shares currently trade at a price-to-earnings ratio of 48, which is well over double the FTSE 100’s current P/E ratio of 18, raising obvious questions about valuation.
That premium is twice the P/E ratio of fellow UK defence contractor Babcock, highlighting just how richly the market is currently pricing Rolls-Royce’s growth prospects.
There is a case to be made that the premium is justified, given the company’s robust demand growth, disciplined cost management, and consistent record of hitting its financial targets.
Rolls-Royce operates in markets where demand is growing, has ambitious expansion plans, and has demonstrated the kind of execution that tends to sustain investor confidence over time.
However, a P/E ratio of 48 leaves little room for disappointment, and any stumble on earnings or a shock to civil aviation demand could push the share price sharply lower.
A softening in customers’ willingness to spend on new civil aviation engines or servicing of existing ones represents a credible downside risk that the current valuation may not fully reflect.
Past performance is not necessarily a guide to future returns, and replicating anything close to a 1,385% gain from a market cap of £116 billion would be an extraordinarily tall order.
While ongoing business momentum could push the share price higher over the next five years, investors considering a position today should weigh both the opportunity and the elevated valuation risk carefully.