The Rolls-Royce share price has crashed 42% in 2022! Here’s why

The Rolls-Royce share price continues to struggle despite improving underlying performance. What’s going on and is this a buying opportunity?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged white man pulling an aggrieved face while looking at a screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Despite the pandemic being almost entirely in the rear-view mirror, the Rolls-Royce (LSE:RR) share price continues to tumble. In fact, it’s fallen by just over 42% since 2022 started.

To put that in perspective, a £1,000 investment in the stock made in January is now worth around £580. And for those who invested before the pandemic, their balance is closer to £315.

What happened? Is this a falling knife? Or should I be getting ready to add this engineering business to my portfolio at a bargain price? Let’s take a look.

The bull case

The initial tailspin of Rolls-Royce shares isn’t hard to understand. With Covid-19 decimating the civil aerospace industry, a large portion of the firm’s revenue stream became temporarily compromised, leading to a record-breaking £3.2bn loss.

Since then, the operating environment has significantly improved. In fact, looking at its latest interim results, all three of its primary divisions are performing admirably.

  • Higher flying hours have pushed civil aerospace service revenue up by 16%, bringing it one step closer to the full recovery expected in 2024.
  • Top-line performance of its defence segment fell by 7% due to contract timings. But Rolls-Royce completed the first milestone in its massive B-52 contract with the US Air Force.
  • Demand in its power systems division has hit a new record, primarily from critical backup power solutions for data centres, growing the order intake by 53% to £2.1bn.

These improvements in underlying performance have collectively enabled free cash flow to surge by over £1.1bn in just a year, bringing it almost back into the black.

Needless to say, that’s excellent news. So, why has the Rolls-Royce share price continued to collapse?

The plummeting Rolls-Royce share price

As always with Rolls-Royce, two factors continue to have investors on edge. The first is debt and the second is net income.

Following approval for the sale of its ITP Aero business, the balance sheet is about to get flooded with around £2bn of capital. Management has already stated that this will be used to pay off a large chunk of its outstanding loans. Yet, with nearly £8bn in debt obligations, Rolls-Royce will need to do a lot more to refortify its financial position.

Regarding the bottom line, earnings for the last six months came in at a loss of £1.6bn versus a gain of £394m a year ago! What happened?

I’ve often highlighted the potential impact of unfavourable foreign exchange fluctuations. And the recent performance of the Rolls-Royce share price perfectly demonstrates how bad things can get.

Due to recent volatility in foreign exchange rates, the firm suffered a £464m profit impact. This was further exacerbated by a £1.5bn loss from a decline in the value of its forward exchange currency contracts.

While these external factors are largely out of management’s control, it does, nonetheless, add more fuel to the fire. So, I’m not surprised to see the Rolls-Royce share price tumble this year.

Is this a buying opportunity? Maybe. But there are too many unknown factors at play for tastes. Therefore, I’m not planning on adding any shares to my portfolio today.

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 assessed. 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.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »