Rolls-Royce shares are rising! Should I buy now?

Rolls-Royce shares have risen over 9% in the last month, topping 90p. This Fool wonders whether now is the time to buy.

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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.

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Watershed results

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.

The verdict

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.

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

Before you consider Rolls-Royce, you’ll want to hear this.

Motley Fool UK's Director of Investing Mark Rogers has just revealed what he believes could be the 6 best shares for investors to buy right now… and Rolls-Royce wasn’t one of them.

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Dylan Hood 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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