The Rolls-Royce Stock Price Growth Story in 4 Simple Charts

The Rolls Royce (LSE:RR.) The share price is the standout performer among FTSE 100 shares over the past two years, up nearly 400%. What a remarkable turnaround it has been since Covid-19 nearly destroyed the business.

So, what are the factors behind the incredible performance of aerospace and defense stocks? And can the growth trajectory continue?

This is what the charts say!

Expansion of margins

CEO Tufan Erginbilgiç’s tenure has been marked by strategic initiatives and a drive for cost efficiency. Shortly after taking the job in early 2023, he derided the company as a “burning platform“which underperformed compared to competitors.

Since those comments, the company has undergone successive rounds of layoffs and adopted a more streamlined operating model. These changes have paid off handsomely.

Rolls-Royce’s underlying operating margin more than doubled in FY23 to 10.3%, while gross margin reached a five-year high of 21.7%.

These figures provide insight into the financial health of the company and have implications for pricing strategies, efficiency and growth potential.

There is little doubt that the strong recovery in margins has been a major factor in the rise in Rolls-Royce’s share price.

Debt reduction

The significant improvement in balance is also noticeable.

For context, Rolls-Royce was forced to raise £7.3 billion in debt and equity at the height of the pandemic, as the company burned through cash to stay afloat while its aircraft fleets remained grounded.

The outlook has changed dramatically. Rolls-Royce has regained investment-grade credit ratings from all major agencies. Net debt has fallen to £2bn from £3.3bn at the end of FY22.

Crucially, the debt-to-asset ratio has fallen to just 0.18, meaning the balance sheet looks significantly healthier today.

Valuation

However, the company now has a higher valuation.

Traditionally, a price-to-sales (P/S) ratio between one and two is desirable from an investor’s perspective. For Rolls-Royce, that multiple has now exceeded that upper limit. The P/S ratio is currently 2.22.

This means that Rolls-Royce’s share price is no longer the bargain it was during the pandemic. A higher valuation poses risks to future returns.

I wouldn’t be surprised if the company’s stock performance in the coming years isn’t as great as it has been in recent years.

Rolls-Royce shares could rise further if future earnings are strong, but they are probably fairly valued rather than undervalued at the moment.

Future goals

Yet Erginbilgiç is not lacking in ambition. Medium-term targets encompassing a range of metrics suggest there is potential for further improvements in line with a 2027 timeframe.

The group has indicated that this progress will be:progressive, but not necessarily linear“Therefore, investors should take into account long-term price volatility.

But the big picture is generally encouraging. The Civil Aerospace division should continue to benefit from a sustained recovery in large engine flight hours. In addition, the Defense branch has several potential growth opportunities, such as the deployment of microreactor nuclear technologies in submarine fleets.

On balance, I think the Rolls-Royce share price growth story remains intact, but we have probably seen the lion’s share of the gains already. I’ll continue to hold my shares for now.

Investors looking to take a position may want to consider discounting their share purchases on a sterling cost basis, allowing them to take advantage of potential declines in the coming quarters.