The Rolls-Royce (LSE: RR) share price has charged impressively higher in recent months. It’s now up 40%, compared to this time last November. And earlier this month, it touched its most expensive since June 2020, above 150p.
Yet despite this rapid ascent, Rolls-Royce’s share price still looks mighty cheap, at least on paper. City analysts think the engineer’s annual earnings will rocket more than 320% in 2022. This leaves the FTSE 100 firm trading on a slight price-to-earnings growth (PEG) ratio of 0.1.
To recap, investing theory says that a reading below 1 suggests a share might be undervalued by the market. And Rolls-Royce’s multiple sits at the bottom of this threshold. So is now the time for me to consider buying the engineer for my shares portfolio?
Sunny skies for Rolls-Royce’s share price?
There are several good reasons why the Rolls-Royce share price could continue soaring. These include:
- New travel restrictions are avoided. Demand for Rolls-Royce shares have taken off amid the steady re-opening of the air travel industry. Fears over a fresh explosion in Covid-19 cases and mass airport shutdowns across the globe as the Delta variant spread had subdued investor appetite earlier. New travel restrictions have been avoided, largely speaking, and interest in Rolls-Royce’s shares is likely to climb the longer this can continue.
- An increasing focus on green technology. Rolls-Royce is investing heavily in low-carbon technologies, a potentially lucrative area as the battle against climate change steps up. This includes the development of its cleaner UltraFan plane engines planned for launch in 2025. The business took its commitment to the green agenda a step further last week when it announced plans to develop small nuclear reactors to help the UK meet its clean energy targets. If successful, this could become an enormous money spinner in its own right.
- Group streamlining continues. Rolls-Royce has embarked on massive restructuring to rebuild its balance sheet and cut costs. And, to date, the business has made impressive progress on this front. Indeed, this month, it completed the sale of its civil nuclear instrumentation & control to bring it closer to its £2bn disposals target. Rolls-Royce’s share price will surely benefit if the firm can maintain this momentum.
Debt concerns
All that being said, I still have enormous reservations about investing in Rolls-Royce. These can be summed up in one word. Debt.
The business had a whopping £4.9bn worth of net debt sitting on its balance sheet, as of June. I worry about how financial obligations at these sort of eye-popping levels will hamper Rolls-Royce’s growth plans. Recent debt levels mean the engineer is unlikely to start paying out dividends any time soon either.
Finally, I’m concerned about how Rolls-Royce will be able to tackle this debt if travel restrictions are re-imposed. As I say, so far the airline industry is in a state of recovery. But any serious upsurge in Covid-19 cases could sound the death knell for the bounceback and put Rolls-Royce back in serious peril.
Rolls-Royce’s bounceback has caught my attention. But I still think it’s too risky to buy right now.
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Royston Wild 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.
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