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.

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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 considered so you should 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.

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