Rolls-Royce (LSE: RR) has not done well for shareholders in 2021 so far, but that might be changing. Over the past week, investors have been buying, and the Rolls-Royce share price has been edging up a little. The company is due to issue a trading update on Thursday, the same day as its AGM, so maybe the renewed interest has been in anticipation of that.
Covid-19 vaccination results have been impressive. And the latest lockdown-lifting moves could be hinting at an opening up of travel before too much longer. The near grounding of the aviation business lies behind the troubles at Rolls, as it earns the bulk of its profits from maintenance and service contracts. And there’s been almost nothing to maintain or service.
But after a reported loss of £4bn for 2020, I sincerely hope we’ll see a lot better in 2021. So what will I be looking for in Thursday’s update? I’m really not too interested in profits (or lack thereof) at this early stage, but there are two things I hope we’ll get some updates on. Both, I think, could drive the Rolls-Royce share price in 2021 — in one direction or the other.
Debt and cash flow
Firstly, I hope to see an update on the company’s liquidity situation. Rolls ended 2020 with debt of approximately £3.6bn, after the company’s refinancing efforts. In good times, that shouldn’t be too much of a burden for a company with a market cap of more than £9bn and annual turnover in excess of £15bn (in the pre-pandemic era). Obviously, good times are not with us now, and Rolls has been bleeding cash.
The company has previously suggested a free cash outflow of around £2bn this year. That increases the risk of needing another cash injection. And that, I think, would see the Rolls-Royce share price hammered yet again. So that’s the second thing I hope we’ll hear — an update on where Rolls currently thinks its cash flow and profit/loss direction might be heading.
Saying that, whatever Rolls-Royce does come up with on Thursday can really only be a reflection of the short-term situation. And my investment decisions are based on long-term prospects. The trouble is, those are very uncertain right now. There’s certainly pent-up demand for air travel. Holidays in the sun seem at least as important as getting back inside the pubs for a sizeable portion of the UK population.
Rolls-Royce share price uncertainty
But how soon that can happen could be critical to Rolls-Royce’s near-term prospects. And the level of renewed volumes should set the long-term scene. If we don’t get flying soon enough to salvage a reasonable part of the 2021 holiday season, Rolls could be in for another year of big losses. So that’s a risk for the Rolls-Royce share price this year. And even optimistic predictions suggest we won’t get back to 2019 flying volumes until the 2024-25 year.
For me, there’s too much uncertainty, and with it too much risk, to invest right now. I do suspect, however, that the upcoming update could indeed spur an upwards share price move, providing it’s at least modestly upbeat.
The post The Rolls-Royce share price has been ticking upwards. Is it time to buy now? appeared first on The Motley Fool UK.
Alan Oscroft 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.
Motley Fool UK 2021