Almost two years ago, Rolls-Royce (LSE:RR.) shares were trading at some of their lowest levels in almost two decades. The engineering giant was struggling under the weight of enormous debt. And bankruptcy seemed almost certain at one point.
However, in January 2023, a change of leadership happened to try and prevent disaster. Tufan Erginbilgiç was brought in as the new CEO, and after reviewing the state of operations, he began executing some radical reforms. Today, we know that the plan was a success, and subsequently, Rolls-Royce shares are now trading at an all-time high.
But how much money could someone have made if they’d invested £5,000 in Erginbilgiç’s strategy in early 2023?
The FTSE 100’s top performer
There have been a lot of tremendous recovery stories coming out of the London Stock Exchange in recent years. Yet almost all of them pale in comparison to the returns Rolls-Royce has generated. Since January 2023, the shares have skyrocketed by 485%. That means a £5,000 initial investment would now be worth roughly £29,250!
By comparison, the FTSE 100 has only generated a total return of 14% over the same period. As such, index investors are now sitting on £5,700. And the £23,550 difference perfectly highlights the growth potential stock picking can deliver when the right businesses are added to a portfolio.
A healthier balance sheet
Having recently reinstated the dividend, management appears confident that Rolls-Royce’s troubles are in the past. The balance sheet still has a chunky pile of loan obligations and equivalents to pay down. But with free cash flow generation now in the billions, it might only be a few years before leverage is completely wiped from the picture.
It seems that debt rating agencies also agree the firm is steadily sealing the cracks. Back in March Moody’s upgraded the firm’s debt rating to Ba1. Later in August, another rating upgrade was announced, boosting Rolls-Royce to Baa3.
In other words, Rolls-Royce’s debt is officially back in ‘investment-grade’ territory. And with this lower risk profile, future borrowing activity should be much cheaper than before, bringing down the firm’s cost of capital.
Where to next?
As impressive as the firm’s performance has been, the valuation may be getting ahead of itself. The group’s latest trading update reaffirmed that operations are on track to meet its recently upgraded full-year expectations. Yet shareholders apparently weren’t satisfied. And the stock subsequently tumbled by 8%.
This sort of behaviour isn’t unusual for growth stocks. But it typically occurs when shares are trading at a premium. And with the tailwinds of the recovering travel market now over, Rolls-Royce has yet to prove it can maintain its momentum into 2025.
That’s why there seems to be a wide spread of opinions from analysts with the Rolls-Royce 12-month share price forecast predicting the stock could rise to as high as 701p or fall to as low as 240p. So far, betting against Erginbilgiç has proven to be a losing strategy. That’s why I think this business is worthy of a closer look.
