THE Rolls-Royce (LSE: RR.) The share price rise shows no signs of slowing down. The stock is currently (November 1) changing hands for an amount 144% more than 12 months ago. This performance defies critics who claim the group is overrated. But is this the case?

There are several ways to assess whether a stock offers good value. The most common is the price-to-earnings (P/E) ratio..

For the financial year ending December 31, 2024 (FY24), analysts forecast earnings per share (EPS) of 18.7p. This means the stock is trading on a forward earnings multiple of 28.8.

This is more than double the average FTSE100. And that makes me think that the group’s shares aren’t particularly cheap.

But wait…

However, others are more expensive.

For example, the forward P/E ratio of the Magnificent Seven in the United States is 35.

But is it fair to compare Rolls-Royce to seven of the biggest technology companies on the planet? Maybe. To me, the group seems to combine engineering excellence and cutting-edge technology.

Tech stocks are expected to maintain a higher valuation for longer. Nothing is guaranteed, but investors are generally willing to pay a higher premium for a company that has the potential to generate above-average revenue and earnings growth.

And if the analysts are right, Rolls-Royce is expected to deliver impressive financial performance over the next three financial years.

They forecast EPS of 21.9p (FY25), 25.6p (FY26) and 29.3p (FY27). If these estimates prove accurate, the stock is currently trading at 18.4 times 2027 earnings.

And by the end of this year, the group will have increased its profits by 56.7%.

On this basis, the stock appears to be reasonably valued.

However, if there is any sign that the company will fail to meet these targets, its stock price will suffer. Recently he faltered when Cathay Pacific reported a problem with one of its engines.

And another pandemic cannot be ruled out. The last one almost destroyed the company.

Another possibility

Another way to value stocks is using the price-to-earnings (PEG) ratio. This is calculated by dividing a stock’s current P/E ratio by its expected EPS growth rate.

Applying this to Rolls-Royce gives a PEG ratio of 0.5. It’s below this one, which suggests it offers good value for money. This could explain why it seems to remain a favorite among investors.

However, those looking for generous levels of passive income may be disappointed. The company is expected to pay a dividend of 5p per share this year, implying a current yield of 0.9%..

But investors generally don’t buy growth stocks for their dividends. They expect excess cash to be reinvested, develop new products, and find smart solutions that will increase profits.

Magnificent Seven yields currently range between 0% and 0.7%. And these meager returns don’t seem to have affected their stock prices too much.

My opinion

Given the group’s growth prospects, I think it’s fair to say that the Rolls-Royce share price still offers some value.

It may not be the cheapest stock on the FTSE 100, but if it can deliver the expected growth in revenue, free cash flow and profits, I don’t think it’s too late to invest .

This is why I recently took a stand.