£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the next year or so hold in store?

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Rolls-Royce Holdings (LSE: RR.) shares have nearly three-bagged in the past 12 months. Don’t you love it when that happens?

Well, I love it less when I didn’t buy. But if I’d put £1,000 into Rolls then, I’d have £2,970 now. Give or take a bit, depending on where the price went in the hours since I wrote this.

Multi-bagger

Now, I don’t think the price can treble again in the next 12 months. Well, I would have said that a year ago… but I’d say I’m more likely to be right now.

A multi-bagging growth stock is the dream of many an investor when they start out. But chasing that dream can lead us astray. And I increasingly think the pursuit of long-term cash cows with good dividend yields is a lot less risky.

As it happens, I think that’s exactly what Rolls-Royce is turning back into. But before I’d buy it as an income stock, I’d want to see today’s growth spurt work itself out. And wait for any fall that might happen.

It’s hard to find a stock that’s likely to grow strongly in the short term.

Finding growth

But looking back, I’d say Rolls-Royce showed all the right signs in the depths of its crisis. The first was that the shares looked seriously oversold in the stock market crash.

Debt can be a big killer, and I saw it as the main risk at the time. But what I didn’t see was how easy it would be for Rolls to get the cash it needed. A government loan as a vital industry helped that, I’m sure.

The firm also had the assets to cover its debt. And selling off non-core businesses has helped reduce it in double-quick time.

It might seem a shame to have to sell off parts of the company. But Rolls was in a bit of a restructuring struggle before Covid. And having to focus on its core and dump the rest might have been a blessing in disguise.

Hindsight

Still, hindsight won’t get me my three-bagger. But seeing the past 12 months does help me get a feel for where Rolls-Royce is now.

And before I’d get too excited about further future gains, I do see danger. Rolls ended 2023 still with £2bn net debt. Liquidity looks fine, but could the next couple of years leave us with a bit of a cash squeeze?

Valuation

That debt also distorts the price-to-earnings (P/E) ratio. It’s forecast at 28.3 for the current year, which is really quite high. And adjusting it for the debt would take it up to an effective 30.

That’s not much extra. But I’m not seeing a lot of safety margin here.

So what might £1,000 invested in Rolls-Royce shares be worth in another 12 months? I see a fair chance the bubble might have deflated a bit by then. But that might just make it an eventual buy for me.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. 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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