What to watch for with Rolls-Royce shares ahead of the big Q4 event

Jon Smith flags up three key points that he’s marked down for the Capital Markets day that could impact Rolls-Royce shares.

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Rolls-Royce (LSE:RR) shares have been shooting higher recently. Up 43% in the past three months, the past year has seen the stock climb 195%.

Even though the half-year results in August gave plenty for investors to digest, on 28 November we have a Capital Markets day event. This is focused on large institutional investors, where the business will present financial and strategy updates. Therefore, it’s a key event and here’s what I’m watching for.

Drilling into the numbers

A big focus will be on free cash flow and net debt. These two elements go together, because if a business struggles with cash flow, it has to raise debt in order to provide liquidity.

This was a problem for Rolls-Royce during the pandemic. However, we got the first real signs that this pressure was easing in the half-year results. For example, versus a negative free cash flow of £68m in H1 2022, it flipped to a positive figure of £356m in H1 2023.

It has been a similar story for net debt, which has been falling thanks to proceeds from disposals.

There will be an update on this at the Capital Markets event, which should give a great insight into how things have gone in H2. Capital expenditure is always going to weigh on cash flow. I’m not discouraging investing in the future, rather I just want to ensure that cash flow stays positive to avoid fresh debt.

Looking at the future

Capex and the progress in the New Markets division are also key. The business boosted investment from £161m in H1 2022 to £268m in H1 2023. There should be some insight into how this is progressing and if any early results are promising.

The electrical and SMR (small modular reactor) projects have the potential to be very profitable further down the line. Let’s also not forget that the UK government has provided financial support here.

The bottom line is a lot of eyes will be following how New Markets progresses. There’s nothing wrong with ploughing money into these ventures to get them going, but there will have to come a point where money starts to be generated rather than just spent!

Checking out the overall tone

Finally, it will be interesting to note the comments of CEO Tufan Erginbilgic about the overall transformation. This includes human resources, management strategy and what it refers to as “commercial optimisation”.

This all might sound a bit fluffy, but aside from pure numbers, sentiment is a key factor in driving the share price. If the CEO is upbeat and rattles off some strong strategy information, investors are probably going to be happy and ultimately avoid selling their now-more-valuable stock.

On the other hand, if the CEO refers to more job cuts looming and a tough year ahead, new investors are likely to be sceptical about buying Rolls-Royce shares at the moment.

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.

Jon Smith 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.

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