Rolls-Royce (LSE:RR) shares have endured a torrid time during and after the pandemic. Even though the aviation industry is flying back to pre-pandemic capacity, the share price remains volatile. I already have a sizeable holding in the firm and recently bought more shares. Let’s take a closer look at the thinking behind my decision.
Share price performance and controlled debt
Over the past year, the share price has fallen by 24%. In just the past week, the shares are down 8%. They currently trade at 82p, although I picked some up at 80p towards the end of June.
Prior to the pandemic, Rolls-Royce shares were trading above 200p, but cash flow issues and the grounding of aircraft meant the share price plummeted to a low of 38p. The chief cause of this was a total collapse in demand for civil aerospace jet engines.
With an end to restrictions, however, the UK-based jet engine and electrical systems manufacturer looks to be in a more solid position.
Financially, the business is in much better shape. At the end of March, the firm had a cash balance of $2.63bn and debt amounting to $7.88bn.
While this debt pile may seem high, the imminent sale of subsidiary ITP Aero could provide Rolls-Royce with £2bn to put towards reducing debt further.
Recovery in civil and defence aerospace
Additionally, for the first three months of 2022, the business reported that civil aerospace flying hours had risen by over 40% year on year. This is critical, because the company is paid per flying hour by airlines using its engines.
There’s always the risk, however, that the civil aerospace segment once again grinds to a halt if another serious pandemic variant emerges.
Furthermore, the business has a healthy pipeline of work to complete in its defence segments. This should provide cash flow over the coming months and years.
SMRs and value for money
Just this week, the firm announced that it had shortlisted six UK sites for the development of its Small Modular Reactor (SMR) technology.
The SMRs are essentially mini nuclear power plants that could enter the grid by 2029. They’re slated to produce the same amount of energy as around 150 wind turbines.
Although this project may not become profitable for some years yet, it’s an indication that the company is planning far into the future.
What’s more, Rolls-Royce shares may be cheap at current levels. By referring to the price-to-earnings (P/E) ratio, I see that the business has a lower trailing P/E than French rival Safran. While I believe I got a bargain when I bought more shares a couple of weeks ago, I think they’re still low.
Overall, Rolls-Royce has become a major part of my portfolio. I’m glad that I bought more shares recently and wouldn’t rule out further purchases in the future owing to an improving operating environment.
