The Rolls Royce share price is down 38% in 2022. Here’s what I’m doing

Given the troubles plaguing the Rolls-Royce share price at the moment, I am tempted to look at other UK shares that offer much better growth potential.

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The Rolls-Royce (LSE:RR) share price has been falling steadily for some time now. After signs of recovery in 2021, shares of the engineering firm are down 46% in the last six months and 27% in the last year. Despite a return to profits and a huge internal restructuring, investors are steering clear of the aviation company. It is now trading as a penny stock at 80p, far from its pre-pandemic highs. 

Here are some reasons why I think the Rolls-Royce share price is falling. They also explain why I’m looking at other exciting UK shares for my long-term portfolio.

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Freefall

After a tumultuous 2020, the airline market is opening up slowly. Although air travel is yet to hit pre-pandemic levels, there was a jump in 2021 and early 2022. Many investors, including myself, expected the Rolls-Royce share price to benefit from this.

However, the recovery was marred by multiple small outbreaks across the world. Air traffic in 2021 was still 49% below 2019 figures. Most international flights flew at less than 50% capacity and the average flight volume in 2021 was 68%. Analysts estimate total losses incurred by the industry during 2020 and 2021 at nearly $700bn. And Rolls-Royce recognised the sluggish recovery and shifted focus to its ‘new markets’ division.

These new segments, including power systems and eco-friendly engines, are very promising but young. And how long will Rolls-Royce take to reach profitability in these spaces? 

The board is already reinvesting a sizable chunk of its revenue into new markets. In 2021, the company recorded an underlying revenue of £10.95bn with an operating profit of £414m. R&D expenditure was £1.18bn, which looks steep considering the low profit margins. I wrote about the uphill battle Rolls-Royce will face in meeting its ESG goals in April, and the situation hasn’t changed.

Also, another major concern for me is the sizeable net debt of £5.15bn in 2021, up 44% from 2020. While the company could turn a steady cash flow from its £50bn order book, I think this debt will leave glaring holes in upcoming results.

Looking elsewhere

Despite the company’s stellar reputation and effective cost-cutting methods during the pandemic, I think its recovery will be very sluggish.

Global stock indexes are very volatile right now. Even if upcoming results are favourable, the Rolls-Royce share price could fall significantly every time there is a small market crash. 

And I think there are much better UK shares for my portfolio that offer growth potential and passive income. Although Rolls-Royce’s new power systems wing is promising, I like Volex shares better. The cable manufacturer works closely with the electronic vehicle industry, which is booming. Although its share price has taken a tumble this year, recent financials look good. The company finished well ahead of analyst estimates and is growing revenue by nearly 30% year on year. 

I also like the Aviva share price right now for its forward dividend forecast of 7.3% yield and steady growth since the pandemic crash. Although dividend payouts have been rocky since the pandemic, the company has pledged £4.75bn through share buybacks and dividends over the coming months. And I think it is a good, stable passive income play for me at the moment. 

Should you invest £1,000 in Rolls-Royce right now?

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Suraj Radhakrishnan 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.

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.

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