Home Business Is there a reason to buy Rolls-Royce shares today?

Is there a reason to buy Rolls-Royce shares today?


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Rolls-Royce (LSE: RR) stocks have proven to be a volatile investment recently. But even today it remains popular FTSE 100 stock thanks to its reputation as an industrial heavyweight.

Rolls-Royce is one of Britain’s most successful and proud engineering stories. He invented the luxury car market with his first car in 1904 Merlin engines later helped the Royal Air Force win the Battle of Britain, and today Rolls is the world’s third largest supplier of commercial engines.

Money trap

But despite these landmark successes, the business has a long history of corporate turbulence. In the past decade alone, it has had to swallow huge fines linked to historical corruption, weathering a drop in demand for its Trent 700 engines, and most recently had to watch how Covid-19 brought the global aviation industry to a standstill.

As a result, the share price of Rolls-Royce continues to collapse. If I had invested £1,000 in an engineer a year ago, my shares would now be worth £674. And unfortunately, the business didn’t pay dividends to cushion the blow.

But past performance is not always a reliable indicator of the future. And someone who has suffered heavy losses over the past year can still be optimistic that Rolls will prove to be a profitable investment in the coming decades.

As a long-term investor, should I consider buying Rolls-Royce shares today?

Three reasons to like Rolls-Royce shares

As a leading supplier of aviation technology, Rolls could see demand for its engines and aftermarket services as the civil aviation sector is expected to grow significantly in the coming decades.

The International Air Transport Association (IATA) estimates that by 2024, the number of passengers worldwide will reach pre-pandemic levels. And she predicts that the industry “will expand significantly” over the next two decades, leading to an average annual increase in the number of travelers of 3.3% between 2019 and 2040.

Graph showing global passenger numbers projections to 2040

Meanwhile, sales of Rolls-Royce equipment to military customers could increase as the geopolitical landscape deteriorates.

The company’s defense division booked £1.4bn of orders between January and June, taking its total order book to £6.5bn. Business may also remain brisk as the West worries about a “Cold War 2.0” and rising tensions with China.

I also think that Rolls-Royce’s development of green technology could prove profitable as the fight against global warming intensifies. Its programs include the creation of the ultra-efficient UltraFan jet engine and the design of a fleet of nuclear reactors for the UK.

Too much risk

Despite​​​​these positives, Rolls-Royce is a stock that I am reluctant to buy just yet.

My main concern as an investor is the company’s weak balance sheet. Net debt continues to rise and stood at £5.13 billion in June. Rolls faces a steadily rising cost of servicing this debt as interest rates rise.

Such huge liabilities could significantly impact Rolls-Royce’s ability to invest for growth. It also casts doubt on when the business will start paying dividends again, as well as the size of future payouts.

Finally, Rolls’ fragile financial position could lead to the company trying to extract more cash from shareholders if the global economy continues to slump and its markets cool.

Rolls-Royce’s share price could rebound strongly. But at the moment, I believe that the risks of owning this share remain too high.

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