The Rolls-Royce share price is rallying! Should I buy?

The Rolls-Royce share price has rallied this month after its latest earnings report, but can it keep climbing? Zaven Boyrazian investigates.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been a good few weeks for the Rolls-Royce (LSE:RR) share price. The UK aerospace company saw its stock rise by a respectable 10%, pushing its 12-month performance to just under 22%. That’s hardly stellar growth in comparison to some of the tech stocks out there. But for a struggling business that was significantly impacted by the pandemic, it’s some encouraging progress. So, what’s behind this upward movement? And should I be adding it to my portfolio?

The rising Rolls-Royce share price

The financial position of Rolls-Royce seems to be heading in a positive direction. The management team recently released its half-year earnings report with some promising results. First and foremost, the risk of bankruptcy that Rolls-Royce was facing in 2020 seems to have subsided. The net debt position is still firmly in the red at around £3.1bn. However, thanks to successful re-negotiations with creditors, the company has no debt maturities until 2024.

This certainly provides some breathing space to get the balance sheet in a stronger position. And the reinvigoration process has only been accelerated thanks to the successful sale of Bergen Engines to Langley Holdings. As a reminder, the sale of Bergen is part of a refocusing effort to raise £2bn through disposals. This is a particularly exciting milestone, as an earlier attempt to sell the business had been blocked out of national security concerns.

While travel restrictions are slowly being eased, the airline industry continues to suffer from disruptions. Consequently, revenue for Rolls-Royce over the last six months fell by 9% compared to a year ago. But thanks to the firm’s operational restructuring, it actually managed to turn a modest underlying profit of £307m versus a loss of £1.63bn last year. So, I’m not surprised to see the Rolls-Royce share price taking off.

The Rolls Royce share price has its risks

There’s still a long road ahead

As encouraging as these latest figures are, Rolls-Royce is not out of the woods yet. The next debt maturity may be a couple of years out, but the interest bills will keep on coming. With such a vast surge in borrowings to keep the company afloat in 2020, interest expense has risen considerably.

Rolls-Royce has had to pay out £116m on loan interest fees in the last six months. Combining this with the £171m paid to cover lease expenses, 93% of its underlying profits are being gobbled up. That only leaves a tiny portion left to reinvest, pay down debt or return capital to shareholders. That’s not a healthy sign in my experience. And consequently, it could lead to the Rolls-Royce share price delivering lacklustre performance over the long term.

Final thoughts

Overall, Rolls-Royce looks like it’s in a much stronger position since I last looked at this business. And with the vaccine rollout enabling the recovery of the travel industry, the firm’s revenue from the sale and maintenance of aircraft engines could be swiftly returning.

Having said that, I’m still not tempted to add this business to my portfolio at the moment. Why? Because I think there are far better and safer investing opportunities to be found elsewhere.

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 assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »