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of Rolls Royce (LSE:RR)’s share price nosedived in early 2020 as the Covid-19 pandemic hit the market. Stock markets have made a meaningful recovery since then. Rolls Royce has no stock. Here’s why.
Rolls Royce makes aircraft engines. However, it does not collect as much revenue as it does from selling engines. Take 2019 for example. Rolls-Royce took £8,107m in revenue from its civil aviation business. However, 60% came from aftermarket services. Airplanes stopped flying when the epidemic hit. When airplanes are not flying, their engines require little maintenance. As a result, Rolls-Royce saw a significant slice of revenue, and perhaps more importantly, a stable cash flow that evaporated when the pandemic hit.
For Rolls-Royce’s share price to rise, planes will have to start flying again, especially wide-body ones. These fly long distances and have large engines under their wings. Before the pandemic, Rolls-Royce was leaning towards the larger motoring market. That may be wrong, as long-haul air travel seems to be leading to narrow-body aircraft even before the pandemic.
Airplanes are taking to the sky again. However, in line with other industry forecasts, Rolls-Royce doesn’t see large motor passenger numbers returning to pre-pandemic levels until 2024. So Rolls-Royce can’t expect earnings to recover until then.
Of course, Rolls-Royce has other areas of business. However, civil aviation is by far the largest. Aviation business volatility will continue to dominate sentiment around Rolls-Royce’s share price through at least 2024.
Debt and dilution drag on Rolls Royce’s stock price
Reduced cash flow during the pandemic forced Rolls-Royce into emergency measures. He cut the dividend and drastically changed his balance sheet and business.
Rolls-Royce’s long-term debt is set to nearly double from £4,910m to £7,497m between 2019 and 2021. Without the increase in debt, the company may not be profitable. In addition, he sold new shares to raise money in the form of equity. The company’s common stock count increased from 5,627m to 8,368m in two years. To make matters worse, Rolls-Royce’s share price fell and he sold the shares in a rush. Despite all this, the company’s financial situation has worsened.
Rolls-Royce raised some cash through the sale of assets from underperforming and non-core businesses. A restructuring effort appears to have begun to improve operating margins. Alongside that 2024 forecast are advances towards greener technologies to form Rolls-Royce’s largest business.
However, the old and new shareholders have a smaller piece of Rolls Royce than they did in 2019, and have a claim on the proceeds. Until the balance is paid off, debt holders collect high interest payments that can go into the business. or divided into fractions. I don’t think it’s over for Rolls-Royce, and I don’t think its best days are behind it. But I believe it will take years for Rolls-Royce’s share price to recover.