The Rolls-Royce Holdings (LSE: RR.) share price almost doubled in 2024, capping a remarkable comeback since the depths of the 2020 stock market crash.
What lies behind the cracking year? And can Rolls shares repeat the feat in 2025?
Debt, what debt?
I’d say the real key to the Rolls-Royce resurgence is debt. Or rather, the way it’s been disappearing.
Debt almost crippled the company in the worst days of the pandemic. Net debt reached more than £5bn by the end of 2021.
Yet at 2024 interim results time in August, the company had this to say: “Net debt reduced to £0.8bn driven by statutory net cash flow from operating activities of £1.7bn.“
What’s more, broker forecasts even put Rolls in a net cash position by the end of the year.
Rolls-Royce gets my balance sheet turnaround of the year award. No, of the century.
New management
Without a doubt, the drive and enthusiasm of now-not-so-new boss Tufan Erginbilgic has put some pep in Rolls-Royce’s step. In November’s trading update he waxed: “Our transformation of Rolls-Royce into a high-performing, competitive, resilient and growing business continues with pace and intensity … There is more we still need and want to do, as we expand the earnings and cash potential of Rolls-Royce.”
Now, I know company CEOs tend to talk things up. But this one has put money where his mouth is. Or rather, in shareholders’ pockets.
I quote him here partly as an example of how he’s been inspiring the astonishing turnaround we’ve seen. But also as a caution.
Beware a slip
There’s a thing I’ve seen happen a lot with very optimistic company sentiment. A company sets itself ambitious goals and meets them regularly. In fact, it exceeds expectations time after time. And the firm’s management is, understandably, openly enthusiastic.
But beating expectations, not just meeting them, can become the expectation rather than the exception.
And if some day a set of results doesn’t quite meet up to the lofty hopes of the biggest investing bulls? We often see them sell up, and the share price slumps.
So, the thing that makes me most nervous about the Rolls-Royce share price outlook for 2025 is exactly that. One quarter perhaps, the company might post very acceptable results, but not outstandingly better-than-expected results.
In fact, I think that’s inevitable. No company that I know has ever been able to always beat expectations.
Forecasts and valuation
I prefer management to under-promise and over-deliver, and not risk falling into the opposite.
Still, even with that in mind, forecasts actually make the Rolls-Royce stock valuation seem reasonable to me.
We’re looking at a forecast price-to-earnings (P/E) ratio of a fairly lofty 32 for the full year. But if earnings keep growing as predicted, it could drop to 25 as early as 2026. And depending on how the next couple of years then look, that could be attractive.
For me? I don’t buy high-value growth stocks these days. But if I still did, I’d be scratching my head over this one.
This post was originally published on Motley Fool
