The Motley Fool

The Rolls-Royce share price fell by 53% in 2020. Should I buy now?

Image source: Getty Images.

2020 was a tough year for the Rolls-Royce (LSE:RR) share price. The pandemic disrupted many industries, but one of the most heavily impacted was aerospace. Unfortunately for Rolls-Royce, that’s the sector in which it generates most of its revenue.

However, now that multiple vaccines are being rolled out, is the Rolls-Royce share price a bargain? Let’s take a closer look.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

What caused the Rolls-Royce share price dive?

Just over 50% of the stock’s revenue is generated by manufacturing and servicing aircraft engines. With Covid-19 keeping most flights grounded, demand for this business segment hasn’t been very high.

As such, Rolls-Royce has suffered significant business loss, and the firm expects to make a net loss of £2.6bn by the end of 2020.

Rolls-Royce share price

Following multiple vaccines becoming available, the aerospace industry has begun recovering, and with it, the Rolls-Royce share price. However, investor expectations should be kept in check as the sector’s rate of recovery will be very slow. So slow in fact that current forecasts indicate that the industry won’t return to pre-Covid operational levels until 2024.

Some worrying financials

If Covid-19 was the only problem facing the business, then at today’s share price, Rolls-Royce would look cheap in my eyes. Unfortunately, the company has been struggling for many years, long before the pandemic began.

Looking at the firm’s net income over the past six years, it has only been profitable for two of them, and not by a large margin.

What’s even more concerning is the state of the balance sheet, more specifically the level of debt. Due to the low operational performance throughout 2020, the management team borrowed more money to keep the business afloat. Today, the firm’s total debt stands at £8.7bn, which is almost the same as the current £9bn market capitalisation of the entire company.

Even before the pandemic, the business was in quite a bit of trouble with its debt level. Combining its pre-Covid interest payments with capital leases results in a negative coverage ratio. In other words, Rolls-Royce isn’t generating enough income to pay its bills.

As such, the firm has been forced to issue new shares to raise capital or take on more debt. And it’s done both – a serious red flag in my eyes.

Rolls-Royce share price: a bargain or a value trap?

The Rolls-Royce share price may recover in the near term as investors regain confidence in the sector and as economies globally start to recover. However, in my opinion, the company has some serious financial problems that need resolving.

As such, it’s not a stock I would buy shares in, even at its current price. I think there are much better opportunities out there to grow my wealth, with a much lower level of risk.

Opportunities such as The Motley Fool UK's top share with plenty of growth potential

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

Zaven Boyrazian does not own shares in Rolls-Royce Holdings. 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.