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Can Rolls-Royce Holding PLC Make £3 Billion Profit?

Rolls-Royce

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at Rolls-Royce Holding PLC (LSE: RR) (NASDAQOTH: RYCEY.US) to ascertain if it can make £3bn in profit. 

Have we been here before?

A great place to start assessing whether or not Rolls-Royce can make £3bn in profit is to look at the company’s historic performance. Unfortunately, Rolls-Royce has never been able to make £3bn in profit although the company did report a pre-tax profit of £2.7bn for 2012. However, I should mention that this profit included some one-off items, excluding these items Rolls-Royce’s 2012 pre-tax profit was only £1.5bn. In addition, Rolls-Royce only recently reported a 41% slump in profit for 2013, which is the first time in 10 years that the engineering firm has missed growth targets.

Having said that, after trawling through Rolls-Royce’s financial report for 2013, I believe that the company has all the foundations in place to make a £3bn profit in the near future. For example, including the acquisition of Tognum, which is now part of Rolls-Royce’s power systems business, on an underlying basis, the company’s revenue jumped 27% during 2013. Further, using the same underlying and adjusted figures, profit for 2013 actually jumped 23% to £1.8bn, excluding one-off items.  

But what about the future?

So, Rolls-Royce put in a solid underlying performance during 2013 and the company’s profit and revenue is only likely to rise from here. Why am I so sure? Well, thanks to Rolls-Royce’s reputation for quality around the world, the company left 2013 with an order backlog totalling $71.6bn, up 19% from the same period last year. 

Let me put this into some perspective, Rolls-Royce’s underlying revenue came in at £15.5bn for full-year 2013, that means that the company’s backlog is locking in around three years worth of revenue at current rates, giving investors plenty of clarity on the groups future outlook.

But there is also evidence to suggest that demand for Rolls-Royce’s products and services will only rise from here-on-out. Specifically, global aviation leader Boeing, expects that over the next two decades, the world will require another 35,000 commercial airliners, worth a total of $5trn. As one of the worlds premier aviation engineering firms, Rolls-Royce is likely to see a huge order inflow as a result of this demand.

What’s more, Rolls-Royce’s management remains committed to cost management, which should only lead to wider profit margins over the next few years.

Foolish summary

Overall, Rolls-Royce’s future looks bright and although the company may have suffered a set-back in the short-term, over the long-term the company’s reputation and the global demand for commercial airliners will only drive revenue, and profits higher. 

So, I feel that Rolls-Royce can make £3bn profit. 

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In the meantime, please stay tuned for my next verdict.

> Rupert does not own any share mentioned within this article.