Rolls-Royce (LSE:RR) shares have been among the worst performers on the FTSE 100 in recent years. Flying high before the pandemic, the stock crashed as Covid-induced lockdowns saw flying hours drastically cut.
Many investors, myself included, thought 2022 might be an easier one for Rolls. However, the share price is down another 49% over the last 12 months. So, let’s take a closer look at Rolls-Royce’s fortunes and explore whether the share price could hit 0p.
Could Rolls really hit zero?
No company is immune from bankruptcy or insolvency. In fact, even state-backed firms such as Rolls-Royce could succumb to market pressures. And that is what it would take for the Rolls-Royce share price to hit 0p.
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But is it really possible? Well, debt is a major issue for Rolls-Royce. As of June, net debt stood at £5.1bn. The group has also been selling business segments in an effort to raise £2bn — some of which has and will be used to reduce the debt burden.
While it’s good to see net debt coming down, servicing the debt is expensive. Rolls is actually barred from paying dividends until at least 2023 as part of its loan terms.
However, debt is becoming more manageable, and barring any further demand shock, the company should be able to stave off bankruptcy fears and start pushing forward. Moody’s recently changed Rolls-Royce’s outlook to stable from negative.
Are things actually improving?
One of the biggest issues for Rolls-Royce this year was the so-called travel chaos. Rolls’s civil aviation segment earns money through flying hours contracts and its been concerning to see the aviation sector recover slower than anticipated. Moreover, some areas of the world, such as South East Asia, are yet to fully reopen to international travel. Having said this, the general trend is positive for air travel.
More broadly, all segments, including power systems and defence, have been boosted this year. The power systems division has seen its orders grow by 53% to £2.1bn over the past year. While the jury is out over the future profitability of the modular nuclear reactor programme, the plan was recently given government approval.
And naturally, as Putin wages war in Ukraine, the defence business is reportedly doing well. The company has existing contracts whereby it provides ongoing support to defence departments around the world.
But importantly, this multi-billion-pound order book gives management good visibility going forward.
Why I’d buy Rolls-Royce shares
I already own Rolls-Royce stock, but I’d buy more. The firm is going through a tough period but there have been major restructuring efforts in order to bring debt under control and enhance profitability.
I also like Rolls because it operates in industries with high barriers to entry. Aviation, power systems, and defence are sectors where there are real premiums on quality. It’s unlikely that newcomers will be able to compete in these industries without a huge amount of start-up capital.
