The Rolls-Royce (LON: RR) share price recently jumped back above 100p, after falling below this crucial level at the end of January. This is important because traders and investors tend to look at crucial levels like this to determine a stock’s momentum. A rising price can encourage more buyers, while a falling price can encourage more sellers.
From the perspective of a long-term investor, this might not seem that important. However, a rising stock price can make it easier for a company to raise money from its investors. A falling stock price can significantly impact a firm’s ability to raise money, which may jeopardise its future.
Even though Rolls recently upgraded its profit forecasts for the year ahead, it’s still struggling. Its outlook is also highly dependent on factors outside of its control. The pandemic has already wreaked havoc on the company’s finances. While light is starting to appear at the end of the tunnel, it could be years before the global aviation industry recovers from the pandemic.
As such, I think the company needs to keep its options open. That’ll be easier with a higher share price and improved investor sentiment.
Rolls-Royce share price risks
As I covered above, I think the business’s outlook is improving. Unfortunately, it continues to face significant risks. These challenges suggest to me that now may not be the best time to buy the stock.
Instead, I’m going to wait to see how the company fairs over the next six months or so. By waiting, I think I’ll be able to gain more insight into the state of the global aviation industry and its potential for recovery in the months and years ahead. This will allow me to better understand what the future holds for the Rolls-Royce share price.
By sitting on the sidelines, I may miss some of the company’s performance if there’s a strong recovery over the next few weeks. However, this is something I’m totally comfortable with. I’d rather miss out on profits rather than end up owning a lousy investment. I’d also rather wait and see the recovery take hold rather than jumping in and hoping for the best at the current time.
Risks and reward
This is based on my own personal risk preference. Other investors may have a different approach. After all, the company’s outlook has improved dramatically over the past six months. As my fellow writer GA Chester recently stated, the stock could have the potential to double in the near-term, based on its free cash flow estimates.
That’s the best-case scenario. But I’m more worried about the business’s worst-case scenario. Rolls may have to raise yet more money from investors in this scenario. That could put significant downward pressure on the Rolls-Royce share price.
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Rupert Hargreaves 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.