For most of this year, it has been tough to pick a good price at which to buy Rolls-Royce (LSE:RR) shares. I’ll admit I was close to buying some of them at 100p earlier this year. Yet as the share price was in a downward spiral at the time, I waited, and it has unfortunately continued to drop.
Now at 71p, it means it’s down 51% over the past year. So rather than try and find the right price, I’m now waiting for certain events to happen.
New areas to offset Civil Aerospace
The Civil Aerospace division was (and still is) the largest part of Rolls-Royce. However, it has been trimmed substantially over the past year. This is largely due to the huge losses posted during the pandemic as flying hours dipped and servicing requirements fell.
With the division’s restructure ongoing, it’s clear this part of the business is unlikely to be smashing targets anytime soon. Therefore, I want to see new areas start to show good results in order to get me excited to invest.
The company spends a large amount on research and development (£371m, according to its half-year results). New divisions include Rolls-Royce Electrical and Rolls-Royce SMR that were presented at its investment day back in September.
If these areas can start to yield results, I’d be more confident that the gap left by Civil Aerospace can be filled.
Debt reduction
As of the end of H1 2022, net debt stood at £5.1bn. This figure bulged over the course of the pandemic in order to keep the business operating. It has since benefitted to the tune of £2bn from the sale of ITP Aero, with £1.7bn going towards paying back its UK Export Finance loan.
With interest rates rapidly rising, any new debt issued is going to be expensive. The financing costs via interest payments will be high. So I want to see existing debt paid down quickly and better cash flow management. If cash management improves, the need to issue new debt should be reduced somewhat.
If this can be brought back under control, it would give me confidence to invest, reducing concerns about the problems high liabilities can cause for a company.
Sitting tight
For the moment, I’m sitting on my hands and not investing. It’s not that I think the business isn’t good value at 71p. But until we get some tangible improvements in the areas mentioned above, I don’t see the share price materially rallying.
A trading update is due out at the start of November. I’ve marked this in my calendar, and might get the answers to my questions. From there, I can assess whether it’s the right time to buy.
The post If these 2 things happen, I’ll snap up Rolls-Royce shares appeared first on The Motley Fool UK.
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Jon Smith 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.