What should a company do when it’s built up big debts during a time of crisis? It needs to lift revenues and cut costs.
So will doing exactly that give Rolls-Royce Holdings‘ (LSE: RR.) shares a fresh boost? I think it might.
On 17 October, the aero engine maker revealed its latest restructuring plans. Unfortunately, they include the loss of 2,000-2,500 jobs, out of a global workforce of about 42,000. But, in the circumstances, I think it could have been a lot worse.
Turnaround plans
It’s all part of CEO Tufan Erginbilgic’s plans to “build a high-performing, competitive, resilient and growing Rolls-Royce.”
The firm will also combine some management areas, as a way to “remove duplication and deliver cost efficiencies.”
When I see a big FTSE 100 company taking costs, debt and financial efficiency seriously, it’s like a breath of fresh air.
Tackling debt
I shake my head when I see a big business building a huge debt pile without really seeming to care too much. And when I see big-spending dividends at the same time, it makes me twitch.
I’m thinking about Vodafone and BT Group in particular here. Both were a lot more resilient in the face of the pandemic slump, so they have that going for them. And it might not be fair to compare such different businesses.
Still, at the last count, Vodafone reported net debt of £33.7bn. BT’s looks a fair bit lower, at £18.9bn, but that doesn’t include its chronic pension deficit.
These make Rolls-Royce’s net debt of £2.8bn, as of June, look like small change.
Good management?
What was it Peter Drucker, one of the pioneers of modern management theory, said? It was…
Management is doing things right; leadership is doing the right things.
Peter Drucker
So I have to ask, are Rolls-Royce’s leaders doing the right things? Since the depths of the recent crisis, they do seem to have been focused on tackling the firm’s debt.
I think that’s exactly the right thing to be doing, and it gives me confidence in how they might manage my money should I ever buy Rolls-Royce shares.
The right way?
But to think about the first part of that quote, are they going about it the right way?
Well, redundancies cut costs, at least in the short term. And that’s good for debt management.
But they don’t exactly help build a positive working environment. The planned job cutting is probably a necessary evil. But I’d like to see it completed as soon as possible and the fears of further cuts recede.
Still, since the dark days of 2020, I do think the Rolls-Royce management approach has been top quality. And, so far, it’s built a much quicker recovery than I’d expected.
Time to buy?
At the moment, it looks to me like there’s a fair bit of optimism already built into the valuation of Rolls-Royce shares. A forecast price-to-earnings (P/E) ratio for the full year of 30 doesn’t look like a screaming buy to me.
Still, I think 2024 could indeed be a year of further progress, and I’m watching for any short-term price dips.
