Rolls-Royce (LSE: RR) shares have struggled ever since the pandemic hit in 2020. Sinking to a low of just 38p in October 2021, the shares have been hovering around the 100p mark ever since. In fact, over the last 12 months, they’ve fallen 16% and year-to-date they’re down an even larger 28%.
However, things seem to have turned around for the aerospace giant as the shares have risen 9.5% in the last 30 days. With Rolls-Royce seemingly regaining some momentum, is now the time for me to buy? Let’s investigate.
Rolls-Royce recently announced its FY2021 results. It’s one of the main reasons why the shares have risen recently as it reported a profit. Although it was only a modest £10m, it was a significant moment for Rolls, which recorded a £4bn loss in 2020. Margins rose by a hefty 23%, which is also very encouraging. And it managed to curb its cash consumption, which fell from £3bn in FY2020 to £1.4bn in FY2021.
In these results, the company also announced that it achieved its restructuring plans, cutting costs by £1.3bn for the year. This was achieved through a 70% decline in capital expenditure and a 34% reduction in headcount. This is great news for a potential investor like me, marking a return to an investment-grade balance sheet.
Looking into the future, I think Rolls-Royce shares have good prospects. The firm is a leader in small modular reactor (SMR) technology and expects approval for the manufacture of these nuclear plants in the UK in mid-2024. If these plans materialise and Rolls remains the industry frontrunner, then it could open a potentially vast market. This would undoubtedly boost the shares.
Rocky road ahead
One big worry I have for the company is how much debt it has. With over £7bn on its balance sheet, Rolls could be hit hard by rising interest rates. As interest rates rise, this monumental debt could become amplified, adding to the cash burn burden the company has worked so hard to reduce. However, Rolls has taken steps to remedy its debt, like selling its subsidiary ITP Aero. Yet this is only a partial fix to a much broader problem.
In addition to the high debt, Rolls-Royce shares could seem overvalued when looking at its fundamentals. The shares currently trade on a price-to-earnings (P/E) ratio of 61. Competitor General Electric trades on a much lower forward P/E ratio of 24. I think the lofty valuation isn’t reflective of the macroeconomic risks the company faces. That being said, this figure should fall drastically once Rolls starts generating consistently higher profits.
So overall, I think Rolls-Royce shares could be an attractive investment opportunity for my portfolio. The valuation is super high, but I think this will return to an acceptable level once the company starts to churn out higher profits. In addition to this, the future plans the firm has excite me. Therefore, I would be happy to add shares to my portfolio at 91p.