Rolls-Royce (LSE:RR) shares were hammered by the pandemic. During 2020 the share price fell over 50% as global air travel came to a standstill. Things seemed to be improving towards the tail end of 2021, however, in 2022 Rolls-Royce shares have sunk over 26% so far. The main reason for this has been a combination of the Omicron variant and the news that CEO Warren East will be leaving the company at the end of the year.
With the shares trading below 100p again, is now a good time for me to load up on the shares for my portfolio? Or should I be steering clear of the FTSE 100 aerospace giant? Let’s take a closer look.
Rolls makes the majority of its money servicing jet engines. As we all know, the pandemic halted this business drastically, and hence Rolls found itself in a tough spot. However, things seem to be steadily improving in the travel sector. In the first week of 2022, there were just under 140,000 European flights, which is a near 100% increase from the same period in 2021. In addition to this, online travel booking agency Skyscanner reported that booked flights for summer were up 400% in January compared to December. The increased footfall will directly benefit the firm and could help push up Rolls-Royce shares in the process.
The 2021 full-year results also contain some encouraging points. Firstly, Rolls actually turned a profit in the year of £10m. Whilst this doesn’t sound hugely impressive, it does highlight the recovery compared to 2020 when it recorded a £2bn loss. It also managed to reduce its negative free cash flow by almost £3bn. Much of this progress has been made from a large restructuring that Rolls undertook in 2021. It cut over 9,000 jobs and reduced its Civil Aerospace division by one-third, which has saved the firm more than £1.3bn.
Headwinds for Rolls-Royce shares
Perhaps the biggest risk I see for Rolls-Royce shares is the huge debt that the company currently has. The current debt pile is sitting at an eye-watering £5.2bn. The main reason this worries me is the threat of increasing interest rates. The Bank of England has already hiked rates, which may climb over the next few months to combat rampant inflation. If this is the case, it could magnify the Rolls debt significantly, which is something it cannot afford at current.
The pandemic still poses a risk for Rolls-Royce shares too. The Omicron variant wreaked havoc with the travel sector earlier this year, and the shares took a beating in the process. If news breaks of another variant, then I expect the shares to slump.
What I am doing now
Rolls has made some steady improvements since 2020, and the company seems to be moving in the right direction. However, for me, the combination of heavy debts and rising rates are a big red flag and a risk that outweighs the firms’ positives. Even though the shares do look cheap, I won’t be adding any to my portfolio today.
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Dylan Hood 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.