3 reasons why I’m avoiding Rolls-Royce shares!

At Rolls-Royce Share price history in 2023 At 154p per share FTSE 100 engineers up 63% since the beginning of the year.

A spectacular recovery in the global aviation industry has raised investor demand for Rolls-Royce shares. More flight activity means better demand for the company’s maintenance services, a phenomenon that leads to higher profits, profits and cash flows in 2022.

I didn’t buy it

The demand for passenger aircraft is predicted to increase significantly in the coming decades, as shown in the graph above. And Rolls-Royce – with its huge investment in new aerospace technology and its installed base – could do well to exploit this opportunity.

But I still have reservations about buying the company’s stock now. Here are just three reasons why.

#1: Green investment fails

The engineer has been building aircraft engines since 1914 and is an important cog in the evolution of the industry. But developing new technologies always carries an element of risk and focusing on designing clean power systems can prove a spectacular failure.

Rolls, for example, is investing large sums in the development of engines that run on sustainable aviation fuel (SAF). But research shows that the commercial potential of this new technology may be limited.

A report from the Royal Society indicated that “at least half of all UK agricultural land“will be needed to grow enough crops to supply all the jet fuel in Britain. Looking for the technology to do so could destroy the value of Rolls’ shareholders.

#2: No nuclear funds

Rolls-Royce is not just about building technology for civil and defense aircraft. The plan to build 16 nuclear reactors, for example, could be a solid profit generator as the UK moves towards net zero.

But a lack of government funding threatens the existence of the small nuclear reactor (SMR) program. Alastair Evans, director of government and corporate affairs at Rolls-Royce SMR, told Reuters last week that the division would run out of cash by the end of 2024.

He added that funding negotiations should begin by the middle of the year. The £500m that Rolls has invested in its nuclear reactor program may prove a costly mistake.

#3: Big debt

The group’s balance sheet has improved as revenue and cash flow have recovered. But net debt of £3.3bn at the end of 2022 still makes for uncomfortable reading, in my opinion.

This could compromise engineers’ ability to fund their growth programs now and later. It may affect plans to start paying dividends again and future dividend growth.

Debt could remain high if the civil aviation market experiences a new downturn. Meanwhile, ongoing cost inflation and supply chain issues are likely to reduce Rolls’ ability to make down payments.

This is an interesting story of recovery. But on balance, I think there are more attractive UK shares available for me to buy right now.