Last year was an excellent year for Rolls-Royce (LSE: RR). The flight engineer was the best performer overall FTSE 100 index. So, have Rolls-Royce shares struggled to maintain momentum this year? Not at all. So far in 2024, the stock has moved up 84%.

That means that, after selling for pennies just a couple of years ago, the stock is now up 121% over a five-year time frame.

Can things only get better, or does the price look high?

Understand how to value companies

Consider this. Is Rolls really worth 84% more than it was as recently as January?

Maybe it is.

After all, there is ongoing evidence of financial turnaround in the company after a difficult few years. It inspires investors with confidence that the engineer can achieve its ambitious medium-term goals.

However, I have my doubts. Much (but not all) of what we see now was already evident or could be predicted at the beginning of the year.

Relative to current earnings, Rolls-Royce now shares trade at a multiple of 20. That’s at the top end of what I’d typically want to pay even for an outstanding blue-chip company.

But I wouldn’t pay that for Rolls, as history has shown – from pandemic-era travel restrictions to the aftermath of the 2001 US terror attacks – that demand for sales and service of civil aircraft engines can suddenly drop for reasons beyond the company’s control, dragging down earnings with it.

No margin for error

On the other hand, the future price-to-earnings ratio looks more attractive if one believes that Rolls can grow its earnings per share in the coming years.

That didn’t happen in the first half of this year, when basic earnings per share actually fell compared to the same period last year (even though what the company says underlying earnings per share grew strongly).

The business has made a number of changes to improve its financial performance, from reshaping its portfolio of businesses to cutting costs. In its medium-term goals, the focus has mainly been on operating profit and cash flows. But if the business can improve them, then I expect that will also help increase earnings per share.

Still, Rolls-Royce shares seem to me to have come a long way in waiting for that to happen. This means there is little (or no) margin for error on the company’s part.

If it doesn’t fully meet expectations, I think the dramatic rally we’ve seen in the stock over the last few years could start to unravel.

Ability to move higher

But for now, that hasn’t happened. In fact, if investor enthusiasm remains at its current levels, I think the Rolls-Royce share price could go even higher from here.

However, as a risk-aware investor, I don’t like it current valuation for a business history has shown can face sporadic significant external shocks. I have no plans to buy.