Rolls-Royce shares are down 12% from their highs. Should those who don’t own them consider buying now?

Rolls-Royce (LSE: RR.) shares have been a phenomenal investment in recent years. Recently, however, theyâve experienced a pullback â currently theyâre trading about 12% below their highs.

Is now the time for those who donât own Rolls to consider buying? Letâs discuss.

Firing on all cylinders

Itâs no secret that Rolls-Royce has momentum today. Thanks to a brilliant transformation by CEO Tufin ErginbilgiÃ§, the company is firing on all cylinders.

In mid-November, for example, the company told investors that itâs expecting underlying operating profit of between Â£3.1bn and Â£3.2bn and free cash flow of between Â£3.0bn and Â£3.1bn for 2025 (despite continued supply chain challenges).

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

We are continuing to progress our transformation programme, delivering profitable growth, and further strengthening our balance sheet.
ErginbilgiÃ§ in November

Looking beyond this operational momentum, one thing I like about the company from an investment perspective is that it has multiple growth drivers. Not only is there the expanding civil aerospace engine market but thereâs also the fast-growing defence and nuclear markets.

The latter two markets look particularly interesting to me. With NATO countries set to spend more on defence, and both governments and corporations looking to use nuclear power, Rolls-Royce should have plenty of growth opportunities in the years ahead.

An expensive stock

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 things become a little less clear with Rolls-Royce.

Because despite the recent share price fall, the companyâs valuation is still very high. Currently, the forward-looking price-to-earnings (P/E) ratio is 32 using next yearâs earnings per share forecast.

To put that in perspective, thatâs higher than the forward-looking P/E ratios on six of the Magnificent 7 tech stocks. Of those stocks, only Tesla has a higher earnings multiple.

Given that high multiple, thereâs a chance that returns from here may not be that great. Note that the dividend yield is only 0.9% so investors shouldnât expect much in the way of income from the stock.

Itâs worth pointing out that earlier this week, Jorg Stratmann, the CEO of Rolls-Royce Power Systems AG sold around Â£2m worth of stock. Would he have sold that much stock if he thought the share price was going higher in the near term?

Better opportunities in the market?

Weighing everything up, my take on Rolls-Royce is that it could be worth a closer look while itâs down 12%. If an investor is really desperate to get exposure to the stock, now could be the time to consider having a nibble.

But I certainly wouldnât load up on it at current levels â the valuation doesnât leave much room for error (eg, a slowdown in one of its markets). Right now, there are a lot of other stocks in the market that appear to have more potential.

The post Rolls-Royce shares are down 12% from their highs. Should those who donât own them consider buying now? appeared first on The Motley Fool UK.

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Edward Sheldon has no positions in any shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.