The Rolls-Royce share price fell by 53% in 2020. Should I buy now?

The pandemic has decimated the aerospace industry, and with it, the Rolls-Royce share price. Zaven Boyrazian explores whether now is the time to buy the shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

2020 was a tough year for the Rolls-Royce (LSE:RR) share price. The pandemic disrupted many industries, but one of the most heavily impacted was aerospace. Unfortunately for Rolls-Royce, that’s the sector in which it generates most of its revenue.

However, now that multiple vaccines are being rolled out, is the Rolls-Royce share price a bargain? Let’s take a closer look.

What caused the Rolls-Royce share price dive?

Just over 50% of the stock’s revenue is generated by manufacturing and servicing aircraft engines. With Covid-19 keeping most flights grounded, demand for this business segment hasn’t been very high.

As such, Rolls-Royce has suffered significant business loss, and the firm expects to make a net loss of £2.6bn by the end of 2020.

Rolls-Royce share price

Following multiple vaccines becoming available, the aerospace industry has begun recovering, and with it, the Rolls-Royce share price. However, investor expectations should be kept in check as the sector’s rate of recovery will be very slow. So slow in fact that current forecasts indicate that the industry won’t return to pre-Covid operational levels until 2024.

Some worrying financials

If Covid-19 was the only problem facing the business, then at today’s share price, Rolls-Royce would look cheap in my eyes. Unfortunately, the company has been struggling for many years, long before the pandemic began.

Looking at the firm’s net income over the past six years, it has only been profitable for two of them, and not by a large margin.

What’s even more concerning is the state of the balance sheet, more specifically the level of debt. Due to the low operational performance throughout 2020, the management team borrowed more money to keep the business afloat. Today, the firm’s total debt stands at £8.7bn, which is almost the same as the current £9bn market capitalisation of the entire company.

Even before the pandemic, the business was in quite a bit of trouble with its debt level. Combining its pre-Covid interest payments with capital leases results in a negative coverage ratio. In other words, Rolls-Royce isn’t generating enough income to pay its bills.

As such, the firm has been forced to issue new shares to raise capital or take on more debt. And it’s done both – a serious red flag in my eyes.

Rolls-Royce share price: a bargain or a value trap?

The Rolls-Royce share price may recover in the near term as investors regain confidence in the sector and as economies globally start to recover. However, in my opinion, the company has some serious financial problems that need resolving.

As such, it’s not a stock I would buy shares in, even at its current price. I think there are much better opportunities out there to grow my wealth, with a much lower level of risk.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian does not own shares in Rolls-Royce Holdings. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I invest in the FTSE 100 – or try to beat it?

Our writer has the option of investing in a FTSE 100 tracker fund. So why does he choose to buy…

Read more »

Young black woman walking in Central London for shopping
Investing Articles

£1,500 to invest in a Stocks and Shares ISA? Here’s how I’d do it

Our writer has been investing in his Stocks and Shares ISA. Here he details how he could put £1,500 in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

2 top FTSE 100 shares I’d buy before the market rebounds!

Christopher Ruane identifies a pair of FTSE 100 shares that have both tumbled in the past year and that he…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

Here’s why the next bull market may have already begun

The UK stock market has taken the Bank of England's interest rate hike in its stride and green shoots suggest…

Read more »

Gold medal
Investing Articles

No contest! Here’s my stock of the week

An update from this company offered some relief from the economic gloom. It's this Fool's stock of the week.

Read more »

Cogs turning against each other
Investing Articles

Scottish Mortgage shares are back on the rise: is now the time to jump onboard?

Scottish Mortgage shares have risen over 25% in the past 30 days. This Fool takes a look at why and…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Why do Lloyds shares seem so cheap?

Lloyds shares have been losing ground and now look cheap on some valuations. So why has our writer removed the…

Read more »

Investing Articles

How to invest in shares to help beat inflation

Soaring prices could well outstrip our investing returns this year. I think it's more important to find shares to beat…

Read more »