Rolls-Royce shares are considered undervalued, but should I buy them?

Rolls-Royce shares are popular at the moment, but Oliver Rodzianko analyses how the company fundamentals fail to live up to the hype.

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Rolls-Royce (LSE:RR.) shares are slightly undervalued, but there are better candidates and inherent weaknesses with the stock make me cautious as an investor. I do not believe the hype other investors are playing into.

Company operations

Rolls-Royce is one of the world’s best-known engineering companies. But the shares do not include the luxury automotive side of the business, which is a subsidiary of Bayerische Motoren Werke AG. The stock represents the company’s aerospace, marine, and energy businesses.

Removing BMW from the picture changes the equation significantly, and Rolls-Royce has some key issues that counteract it trading at what I would consider just below fair value. So I’m still not adding it to my portfolio at the current price.


Long-term revenue has been up and down, and has risen from £9bn to £13.5bn from 2008 to 2022, which is unimpressive. The company has also issued £907m of debt over the past three years. That being said, the operating margin as of June 2023 is 9.41%, and it is ranked better than 60% of companies in the Aerospace and Defence industry. Operating margin is on the rise after five years of decreases and negative margins from 2015 until 2020.

Opportunities and risks

Rolls-Royce has significant diversification, particularly amongst its three core divisions, and US government defence contracts, which creates some long-term certainty in terms of revenue. $1.8bn valued contracts for the US Department of Defence were reported in 2022, planning to span five years.

The company’s debt-to-equity ratio is currently -1.13, signalling the company’s liabilities significantly exceed its assets. The debt-to-equity ratio has been negative since 2018 and hasn’t improved over the long term since 2020. This severely concerns me, and I primarily won’t purchase shares due to the unrealistic fundamental changes required for a turnaround any time soon.


The price-to-earnings (P/E) ratio is currently 12.19 and is ranked better than 86% of competitors in Aerospace and Defence. I performed a realistic free cash flow discounted cash flow analysis, with an 11% discount rate, a 5% 10-year growth stage and a 4% 10-year terminal stage. This resulted in a fair value of £2.31 and a margin of safety of 4.33%; the shares are currently £2.21. To me, this valuation signals that adding Rolls-Royce shares to my portfolio would be uncompetitive over the long term.

Personal take

My analysis points towards the fact that Rolls-Royce shares are selling at a good price but have unpromising future financial prospects. I consider the shares to have too much debt and some safe contracts, but a lack of momentum in terms of revenue and depressed equity metrics. 


Rolls-Royce shares are getting a lot of hype at the moment, but I believe this is unwarranted. I felt compelled to analyse the company to understand if it had a place in my portfolio as a value play, but I can’t find a compelling reason to buy them.

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.

Oliver Rodzianko 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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