Rolls-Royce (LSE: RR.) shares have been on a good run since February when it announced full-year results. This is at the same time when many other FTSE stocks have been on a downward trajectory due to stock market volatility caused by macroeconomic pressures such as rising interest rates and soaring inflation.
Could now be a good time to pick up some Rolls-Royce shares ahead of H1 results in a couple of weeks time?
Rolls-Royce shares rally after a disappointing period
A lot has been written about Rolls-Royce’s woes since the pandemic so I won’t repeat it. To summarise, the pandemic hampered the business badly and it had to borrow money and dispose of some of its assets to keep the lights on. Naturally, the shares tumbled.
So where are we now with Rolls-Royce shares? Well, as I write, they’re trading for 148p. At this time last year, they were trading for 88p, which equates to a 68% increase over a 12-month period.
Rolls-Royce reported positive FY results in February. The results weren’t what I would call remarkable but the key takeaway for me was that it managed to keep its promises. This is something it has struggled to do in recent years, sometimes through no fault of its own due to external factors. Rolls-Royce shares are up 38% since that update was released back in February.
An opportunity or one to avoid?
So let’s start by taking a look at what’s next for Rolls-Royce. Its first-half results are due in a few weeks time. The business has stuck to its original guidance and forecasts an operating profit of close to £1bn as well as free cash flow between £0.6bn and £0.8bn.
The guidance around cash flow is important. A similar amount of cash was declared in Rolls-Royce’s FY results in February. If guidance is met again, this tells me the firm doesn’t need to raise more capital to shore up its balance sheet. Overall, if it can fulfil this guidance, then Rolls-Royce shares should at least remain steady, and potentially move upwards.
Next, let’s tackle the elephant in the room, debt. Rolls-Royce has a lot of debt on its books. At present, debt can hinder growth initiatives, as well as eat away at any profits. Add to this the cost of servicing debt, especially right now due to high interest rates, there is a bearish outlook here for me.
The bright note for Rolls-Royce is that it has managed to pay down some of its debt in recent times. In fact, it paid off close to £2bn in the past year. It is worth noting that a lot of this cash came from disposals. Future debt repayments could come from profits, which could hinder growth aspirations as well as investor returns.
What I’m doing now
It’s clear to me that Rolls-Royce is going through a transformational period. There are some positives to note, but still a lot of work to do.
At this stage I’m going to sit on the sidelines and keep a keen eye on developments, namely the H1 results coming soon. I’d be interested to see what happens to Rolls-Royce shares once these are released. I’ll revisit my position after the results are declared.
