What might get the Rolls-Royce (LSE: RR) share price climbing again? Generally it’s got to be a strengthening aviation recovery, a resumption of revenue and profits growth, and balance sheet improvements.
But today, I want to pick three specific items from the company’s 2021 results which I think could highlight the key improvements.
It was great to see Rolls delivering an operating profit for the year. The underlying figure was only a modest £414m, but that was a big turnaround from 2020’s operating loss of £2bn. Earnings per share turned positive too, though only just.
Cash is king
But despite the profit, Rolls-Royce still suffered from significant cash outflow in 2021. We saw a big improvement from 2020’s £4.2bn. But the 2021 outflow of £1.4bn led to a further increase in debt.
Net debt at the end of 2021, excluding lease liabilities, stood at £5.2bn. That was a £1.6bn increase over 2020’s figure of £3.6bn.
Profit is good, but when it’s only on paper and doesn’t convert to cash, it can’t really be used to pay down debt. And getting that huge debt falling is, I think, key to any long-term gains for the Rolls-Royce share price.
At 2021 FY time, the company said it expects “to generate modestly positive free cash flow in 2022, seasonally weighted towards the second half of the year”. We might not see much progress in the first half, then.
Restructuring and disposals
Rolls-Royce reported restructuring run-rate savings of more than £1.3bn in 2021, which was ahead of schedule. Disposals were on-track too, and expected to deliver around £2bn. The company told us the disposal proceeds were to “be used to reduce net debt, in line with our ambition to return to an investment grade credit profile in the medium term”.
The largest disposal, of ITP Aero, is expected to complete in the first half of 2022. So with a bit of luck, we’ll see the results of that when first half figures are released. And we should hopefully see a worthwhile impact on net debt.
Rolls-Royce share price hampered by debt
Building up large amounts of debt was inevitable if Rolls-Royce wanted to survive the pandemic crunch. But as the company’s refinancing phase draws towards a close, I fear investors might start to overlook it. And I think that would be a big mistake.
I have wanted to buy Rolls-Royce for some time now, but the debt is the one thing that really holds me back. For me though, there isn’t any magic debt level that would ease my concerns sufficiently for me to invest.
No, it’s the direction the debt is moving that really matters. I want to see clear progress in reducing it, and a commitment by the company to keep on pushing it down.
If I see that during the year, I will really start to think the Rolls-Royce share price recovery could be on. And that’s when I will seriously consider buying.