On Thursday 3 August, the Rolls-Royce (LSE:RR) half-year results are due out. This is only just over three weeks away, so it makes sense to get prepared for the potential news and what the reaction could be. This is especially important given Rolls-Royce shares have been treading water in recent months — ever since the strong rally in Q1. The upcoming results could provide a key move either higher or lower.
Current financials versus plan
Back in February, the growth stock surged higher after the optimism around the 2022 results and what it could mean for this year. The stocks is up 70% over the past year. Operating profit jumped to £652m last year, with the guidance being given that 2023 should deliver a further increase to £0.8bn-£1bn.
In the May trading update, the business confirmed that it was still on track to reach this goal. It spoke of the benefits from “our transformation programme workstreams and good end market demand for our products and services”.
I believe that a key element of the half-year results will be if this guidance is maintained or not. If it holds to the projections, it’s a great sign. Not only does that highlight continued profitability, but it also shows that the management team can be believed when it makes such statements.
Transformation progress
The new CEO, Tufan Erginbilgic, said in February that the planned “transformation programme will improve our efficiency and commercial outcomes”.
Sometimes management can be guilty of talking about a strategy shift or a large transformation of a company, but not actually doing much. The upcoming results will provide a perfect platform to judge whether the CEO has results from what he spoke about.
Granted, it’s a large business to turn around. But are we seeing efficiencies coming through from the restructured Civil Aerospace division? Is free cash flowing improving as a result of streamlining operations? I feel investors will be keen to see what has improved (or worsened) over this period.
The situation on debt
The final point I feel will impact the share price will be the debt levels. The company has made significant progress on reducing the net debt figure over the past 18 months. This has been in part due to large asset sales, with the proceeds being used to pay off borrowings.
As of the end of last year, net debt stood at £3.25bn. With a debt-to-EBITDA ratio of 2.47, it’s below the figure of three that is usually as high as is acceptable. Yet I feel it should be reduced further, ideally from a clear effort to pay down more debt this year.
I’m sure the business will comment on debt levels in some form. From the stance and tone of what is said, investors will be able to make up their own minds as to whether the current level of borrowings is acceptable or if it could lead to problems.
