Is the Rolls-Royce share price primed to rally? Here’s what the charts say

Jon Smith considers some charts that indicate to him that the Rolls-Royce share price could move higher over the next year, but at a slower pace.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past month, the Rolls-Royce (LSE:RR) share price is basically unchanged. This has provided some time for investors to take a breath following the 122% gain over the past year. Yet as we start to gear up for the final quarter, many are wondering if the stock could head higher into year-end and beyond. Here’s what I found when taking a closer look.

Lower debt helps

One factor that should help the share price to rise further is the continued reduction of net debt. During the early part of the pandemic, the firm was forced to take on significant debt in order to keep the business afloat. After all, there was a sharp drop in demand in the civil aerospace division with the lockdowns.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

By the middle of 2021, the pile stood at over £5bn. This threatened to seriously hurt the company. Although the world started to return to normal, the interest payments on this debt were high. Yet as part of the strategy pivot and transformation, the management team has been focused on reducing its liabilities.

Net debt for H1 2024 returned to the level seen before the pandemic, as shown below.

Based on that trajectory, I believe this should continue. And it should support the stock in two main ways. One is that interest costs will fall, freeing up cash flow for other business needs. The other is that part of how we value a stock is based on the net asset value. Reducing debt (a liability) ultimately helps to increase the value of the company overall.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Rising enterprise value

A second factor that could suggest further gains for the stock is the enterprise value. As shown below, the enterprise value for Rolls-Royce has been shooting up over the past year. This figure is an alternative way of measuring the worth of a company, instead of just looking at the market cap.

At the moment, the enterprise value is £43.44bn, with the market cap at £42.63bn. Although they are different ways of valuing a company, the two figures should be similar to each other. Therefore, if the enterprise value keeps climbing, I’d expect the market cap (and the share price) to do the same.

Relative value climbing

One concern some might have is that since the business flipped to being profitable, the stock is no longer undervalued. In fact, the price-to-earnings (P/E) ratio is now above 18 and has been climbing since the firm posted its profit in 2023. The chart tracking the ratio is shown below.

When considering if the stock can keep rising, the P/E ratio does become more valid. I use a ratio of 10 as a benchmark of fair value. That 18 isn’t ridiculously high, but it certainly gives me the impression that the share price is a little high. Therefore, we could see the stock continue to tread water until earning per share rise to make the ratio more balanced.

Ultimately, I do think the stock can continue to push higher in the coming year, but at a much more reasonable pace. As such, I’m not in a huge rush to buy the stock right now.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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 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.

More on Investing Articles

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With value investing back in vogue, I’m taking a leaf out of Warren Buffett’s playbook

With tariffs and trade wars resulting in heightened market volatility, Andrew Mackie takes comfort in Warren Buffett’s words of wisdom.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »