When I write, Rolls-Royce (LSE:RR) shares are up 999.8% in five years. This represents a phenomenal 10x return for anyone who invested five years ago.

Why did this happen and will this streak continue?

In low, it is because three vast forces struck at once. The company underwent a deep internal restructuring, recorded a mighty recovery in end markets and entered a period of financial discipline.

After years of destitute performance, the company began seriously repairing its balance sheet and streamlining its operations. Management reduced costs, simplified operations, sold non-core assets and focused on generating cash rather than research and development per se.

Investors have been waiting for this change for a long time, and once the benefits started showing up in the numbers, confidence quickly returned.

At the same time, civil aviation came back with a bang after the pandemic. Rolls-Royce makes money based on the number of hours its engines run, so more constant long-distance travel has directly increased revenues. Defense is another still engine of power, and geopolitical tensions create a deep book of military machines and support contracts.

And then the execution happens. Rolls-Royce has repeatedly improved its earnings and cash flow guidance. With each update, the market had to reassess its valuation FTSE100 business.

Combined with Rolls-Royce’s alleged technological advantage in tiny modular reactors (SMRs), these factors changed sentiment.

For comparison, three years ago it was about the 60th largest company in the index. Today is the fifth time. This shows how far he has outperformed.

OK, what’s next?

I understand that readers often find valuation metrics lifeless. But they are also the most essential. At 37.8 times forward earnings, the stock is trending toward the pricier end of the industrial segment. This is supported by its growth-adjusted price-to-earnings-to-growth (PEG) ratio of 2.8 (traditionally one is a sign of value).

It’s steep. But the caveat is that Rolls-Royce is quite special. Manufacturing aircraft engines and propulsion systems is an industry that is very challenging for anyone to break into. The threat of competition is quite low. This gives it a higher valuation – roughly on par with like-for-like GE.

However, my thoughts are twofold. The company’s valuation already includes many growth expectations. Re-rating – when the market changes the valuation of a company, causing its price to rise or fall significantly without a corresponding change in its current earnings – is not an option.

Instead, the company needs another catalyst for the stock price to rise again. This could mean exceeding earnings expectations and raising guidance again. Or it could be more good news on the SMR front.

I think it’s worth considering, but the margin of safety is much lower than before. I was buying Melrose Industry as my favorite industrial stock this year.