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Rolls-Royce’s shares are eye-wateringly expensive. The FTSE 100 aerospace and defence company trades on a price-to-earnings (P/E) ratio of 40.5. Given that the UK’s large-cap index has an earnings multiple of less than half that figure, with its P/E ratio currently amounting to a relatively modest 16.5, it may seem difficult to justify the stock’s extreme market valuation.
However, doing so is much easier than many investors may initially assume. For starters, the company has an exceptionally strong financial position that indicates it is a high-quality business which is worthy of a premium market valuation. This is evidenced by a net cash balance of £1.9 billion as at the end of its financial year, which suggests it is well placed to overcome any near-term economic challenges from elevated geopolitical risks.
Indeed, security fears across developed economies that have been amplified in recent years by conflict in Ukraine and the Middle East provide a long-term growth catalyst for the business. Given that the company’s defence segment accounts for 24 per cent of its total revenue, a surge in the proportion of GDP spent by Nato members, which includes six of the ten biggest economies, from 2 per cent to 5 per cent by 2035 should bolster its financial performance.
So, too, should the long-term growth prospects within the civil aerospace sector. According to the International Air Transport Association (Iata), global air passenger demand is set to more than double between 2024 and 2050. This should mean growing demand for the company’s aircraft engines, as well as subsequent maintenance requirements, that have a materially positive impact on its bottom line. Civil aerospace sales account for 52 per cent of total revenue.
Rolls-Royce’s sky-high valuation is further justified by its growth potential amid the world’s push to achieve net zero. The company’s exposure to battery energy storage systems, small modular nuclear reactors and marine propulsion that produces lower carbon emissions means it is increasingly well placed to benefit financially from the global energy transition.
Read more: [https://www.thetimes.com/business/companies-markets/article/shares-in-rolls-royce-5rdbs6crs?utm\_medium=Social&utm\_source=Reddit&utm\_content=branded](https://www.thetimes.com/business/companies-markets/article/shares-in-rolls-royce-5rdbs6crs?utm_medium=Social&utm_source=Reddit&utm_content=branded)