The most effective part of the whole FTSE100 index last year was an aeronautical engineer Rolls-Royce (LSE:RR). Fast forward to 2025 and has this massive surge in Rolls-Royce shares reversed?

As if.

In fact, Rolls-Royce’s share price rose. So far this year, that’s the case enhance by 93%. Compared to 5% for the entire FTSE 100 index, this is again an excellent result.

What is driving the enhance in share prices

To discover the reasons behind this skyrocketing price, it’s worth considering a few different factors.

One of them is customer demand. After a very hard period due to government-imposed travel restrictions and faint consumer demand during the pandemic years, airlines are struggling to meet growing demand, which means they are maintaining planes and ordering modern ones.

The production of aircraft engines is a hard and exorbitant business, therefore the barriers to market entry are high. This gives the few dominant players, such as Rolls-Royce, pricing power.

Another factor was performance beyond the core civil aviation division. European governments increased their military budgets, helping the Rolls defense division. Meanwhile, the need for its expertise in nuclear power generation is growing.

But there were also internal factors at play. Since the beginning of last year, the modern management has set very aggressive development goals. Business results are good so far. I think that if Rolls-Royce continues to strive to meet or even exceed these targets, the company’s share price could rise even further from here.

The current price-to-earnings (P/E) ratio of 21 may seem high today (at least to my taste). However, if earnings grow strongly – as the company’s strategy suggests they might – the forward-looking P/E ratio seems to me to still be potentially budget-friendly from a long-term investor’s perspective.

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Potential for further profits – but no guarantees

What’s keeping me from investing in Rolls-Royce – and I have no plans to buy shares at the moment – is what else might happen.

For example, what if an ambitious development plan fails?

Rolls has a decades-long history in mixed performance. For example, let’s look at the pointed enhance in earnings per share.

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Its operations involve high fixed costs and projects whose schedules can shift dramatically due to external factors, such as airframe manufacturers postponing release dates.

I think the current Rolls-Royce share price reflects investors’ hopes that the company will implement its plans. So if that doesn’t happen, I expect the share price could drop.

Another significant but external factor that Rolls has been struggling with for decades is demand shocks in civil aviation, which are beyond Rolls’ control. The pandemic was the latest in a long line of such shocks, from the 2001 U.S. terrorist attacks to volcanic ash clouds grounding European aviation.

I see a risk that such an event will reduce demand again in the unknown future.

In my opinion, the current Rolls-Royce share price does not provide me with enough margin of safety to compensate for this risk.