Rolls-Royce (LSE: RR.) Shares have been a phenomenal investment in recent years. However, they have recently experienced a pullback – currently trading approximately 12% below their highs.

Is now the time for those who don’t have a Rolls to consider buying one? Let’s talk.

It’s firing on all cylinders

It’s no secret that Rolls-Royce is animated today. Thanks to the brilliant transformation by CEO Tufin Erginbilgiç, the company is operating at full speed.

For example, in mid-November, the company told investors that it expected operating profit of between £3.1 billion and £3.2 billion in 2025 and free cash flow of between £3.0 billion and £3.1 billion in 2025 (despite ongoing supply chain challenges).

Last year, underlying operating profit was £2.5 billion and free cash flow was £2.4 billion. So profitability and cash flow are clearly heading in the right direction.

We continue our transformation agenda, delivering profitable growth and further strengthening our balance sheet.
Erginbilgiç in November

Looking beyond the operational dynamics, one thing I like about this company from an investment perspective is that it has multiple growth drivers. There is not only a growing market for civil aircraft engines, but also a rapidly growing defense and nuclear market.

These last two markets seem particularly fascinating to me. With NATO countries willing to spend more on defense and governments and corporations alike looking to embrace nuclear power, Rolls-Royce should have plenty of room for growth in the coming years.

Expensive shares

Of course, just because a company has growth potential doesn’t mean it will be a good investment. We need to look at its valuation.

This is where the Rolls-Royce situation becomes a little less clear.

Because despite the recent decline in share prices, the company’s valuation is still very high. The current projected price-to-earnings ratio (P/E) is 32, taking into account next year’s earnings per share forecast.

For comparison, this result is higher than the forward-looking P/E ratios of six technology companies from the Magnificent 7 group. Only of these stocks Tesla has a higher earnings multiplier.

Given such a high multiplier, there is a risk that the returns from here may not be that high. Keep in mind that the dividend yield is just 0.9%, so investors shouldn’t expect much profit from the stock.

It is worth noting that earlier this week Jorg Stratmann, CEO of Rolls-Royce Power Systems AG, sold around £2 million worth of shares. Would he sell that many shares if he thought the stock price would raise in the near future?

Greater opportunities on the market?

In conclusion, my opinion on Rolls-Royce is that it is worth taking a closer look at since its price has dropped by 12%. If an investor really wants exposure to stocks, it might be time to consider a share bite.

But I certainly wouldn’t overdo it at the current level – the valuation doesn’t leave much room for errors (e.g. slowdown on one of the local markets). There are many other stocks on the market today that seem to have more potential.