Over the previous 12 months, shares in Rolls-Royce (LSE: RR) have tripled. That’s some achievement. The Rolls-Royce share price was the very best performing amongst FTSE 100 shares final 12 months.

This 12 months has continued effectively, with the shares leaping by over half, to this point.

The shares hit a brand new 12-month excessive this week and have been edging nearer to £5, reaching £4.72 at one level. In the event that they get to £5, might they preserve going and hit £6?

Robust enterprise efficiency

When a share triples in a 12 months, one in all two issues usually occur (or each without delay). Both the enterprise prospects look a lot better than earlier than, or buyers are shopping for in with a spirit of hope relatively than pure monetary judgment.

It may very well be {that a} share price that was beforehand undervaluing the corporate is snapping again into form. However to try this by tripling is uncommon.

Within the case of the Rolls-Royce share price, what’s going on? Actually, the enterprise has been enhancing its efficiency. Final 12 months noticed revenues soar 22%. A £1.5bn statutory loss the prior 12 months was a £2.5bn revenue. Underlying free money flows greater than doubled, to £1.3bn.

In addition to an improved efficiency, the outlook for the corporate is stronger than a 12 months in the past.

In that interval, the aeronautical engineer has unveiled a difficult set of medium-term targets. For instance, it expects free money stream to hit £2.8bn-£3.1bn by 2027.

Is the share price getting frothy?

Nonetheless, whereas the enterprise is powering forward, does that benefit the kind of soar now we have seen to this point within the Rolls-Royce share price, not to mention pushing it to £6?

I feel the reply could be sure. A share price tripling in a 12 months could sound frothy. However valuing the corporate on the premise of its 2027 targets, a £6 share price appears affordable to me.

That may indicate a market capitalisation of simply over £50bn. That may additionally recommend a price-to-earnings (P/E) ratio (based mostly on underlying working revenue, not statutory earnings) of 16-20. The price would characterize 16-18 instances free money flows.

These ratios are a bit excessive for my consolation, however they may very well be justified. Certainly, Rolls’ US rivals RTX and GE Aerospace commerce on a P/E ratio (based mostly on web earnings) of 20 and 38 respectively.

The targets are solely medium time period. If the corporate builts investor confidence by reaching them (between now and 2027) after which units larger long-term objectives, the share price would benefit a premium, in my view.

So £6 seems to be achievable to me, from a long-term investing perspective.

Heaps to show

However I’m not investing on the present share price, for 2 key causes. First, these targets are simply targets. Progress is robust however there’s a lot nonetheless to show.

After the share price acquire, I feel the Metropolis will probably be unforgiving if Rolls-Royce doesn’t ship on what it has set out. It has an extended historical past of inconsistent efficiency underneath varied managements. I see that as an ongoing threat.

Secondly, a sudden dip in demand exterior Rolls’ management might upset the apple cart virtually in a single day, because it did with the pandemic and 2001 terrorist assaults. I don’t assume the present price adequately displays that threat.