Is RBC’s 24.7% Return Signaling an Opportunity After Digital Expansion News?

Thinking about what to do with Royal Bank of Canada shares right now? You are not alone. With the stock closing at $206.89 and a steady rise of 1.3% over the last week, it is no wonder investors are paying attention. Long-term holders have been well rewarded, too, considering RBC's five-year return sits at a remarkable 166.0%. These gains stand out even amid a changing economic environment and evolving regulatory landscapes, which can sometimes spook investors or embolden them, depending on the week.

Much of this steady climb comes on the back of RBC's strategic expansions, particularly their move to strengthen digital banking platforms and tap into global wealth management markets. These developments hint at ongoing growth potential, but they also mean the market is weighing new risks alongside those familiar blue-chip advantages. Over the past year, we have seen a notable 24.7% return, all while news stories have focused on RBC's efforts to further diversify its portfolio and invest in sustainable finance initiatives, trends that are quietly shaping the conversation around future value.

How does all this stack up when it comes to valuation? Numerically, RBC earns a value score of 2 out of 6 on our system tracking undervaluation across multiple criteria. This suggests value seekers might have to look a little harder for that edge. Next, let's break down the standard valuation checks and their meaning for RBC stock, before we dig into a smarter way to assess what it is really worth.

Royal Bank of Canada scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Royal Bank of Canada Excess Returns Analysis

The Excess Returns model assesses a company's ability to generate returns above its cost of equity on invested capital. In Royal Bank of Canada's case, the model highlights how efficiently RBC puts its resources to work compared to shareholder expectations and underlying risks.

For RBC, the average Return on Equity (ROE) stands at a robust 15.87%, well above the cost of equity of CA$7.01 per share. Analysts estimate a stable earnings per share of CA$15.29, based on a consensus regarding future return rates. The bank's book value per share is reported at CA$88.30, with forward-looking estimates suggesting a stable book value of CA$96.32.

The core figure here is the excess return of CA$8.28 per share, which confirms RBC’s consistent ability to generate shareholder value above the cost of capital. The intrinsic valuation based on these returns results in a fair value estimate of CA$273.34 per share, which is significantly higher than the recent price of CA$206.89. This model indicates that the stock may be trading at a 24.3% discount relative to its intrinsic value.

Overall, the Excess Returns analysis highlights a well-managed bank that is efficiently leveraging its capital and prospects for growth.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Royal Bank of Canada.

Our Excess Returns analysis suggests Royal Bank of Canada is undervalued by 24.3%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Royal Bank of Canada Price vs Earnings

The Price-to-Earnings (PE) ratio is widely used for valuing profitable companies like Royal Bank of Canada because it directly connects a company’s share price with its earnings power. For investors, PE is a quick way to gauge how much the market is willing to pay for a dollar of earnings. Growth expectations and risk play a key role here. Steady, defensive businesses with reliable growth may justify a higher PE, while riskier or slower-growing firms typically attract lower multiples.

Looking at the numbers, Royal Bank of Canada is trading at a PE ratio of 15.54x. This sits above the average for Canadian banks, where the industry PE is 10.31x, and also higher than the average peer multiple of 13.86x. At first glance, this premium could suggest investors are factoring in stronger growth, higher profitability, or a perception of greater stability compared to its peers.

To provide a more tailored benchmark, Simply Wall St’s "Fair Ratio" integrates factors such as RBC’s earnings growth prospects, profit margins, market cap, risk profile, and industry position. This approach goes beyond basic comparisons to peers or the industry, offering a nuanced view of where a reasonable multiple should land for Royal Bank of Canada specifically. In this case, the Fair Ratio for RBC stands at 14.07x. Since the company’s current PE is only modestly above this level, the market's pricing appears quite reasonable and not stretched or significantly undervalued by proprietary standards.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Royal Bank of Canada Narrative

Earlier we mentioned that there's an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is a clear, user-driven story that ties your assumptions and perspective on Royal Bank of Canada directly to a set of future revenue, earnings, and margin forecasts, which then connect to a calculated fair value for the stock. Rather than relying only on static ratios or analyst targets, Narratives allow you to define your own view of what will drive RBC’s future, whether it's digital banking growth, cost efficiencies, or macroeconomic risks, and see how those belief-driven projections translate to actionable valuations.

Narratives help investors make buy or sell decisions by directly comparing their unique fair value estimate with the current share price, updating automatically as new financial results or news emerge. They are simple to build and review on the Simply Wall St Community page, where millions of investors collaborate and compare perspectives. For example, one investor’s bullish Narrative on RBC might assume a price target of CA$227.0 due to strong digital platform growth, while a more cautious Narrative leads to a CA$169.0 estimate emphasizing credit risks. This shows just how dynamic and personalized decision making can be with this tool.

Do you think there's more to the story for Royal Bank of Canada? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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