Rolls Royce shares have soared! Was I a fool not to buy them?

I’m sorry, but Rolls-Royce shares have been launched since the start of 2023. Meanwhile, my portfolio has bumbled, still licking its wounds from a poor showing in 2022.

So, I was an idiot for not buying it a few months ago, right? Yes and no.

Share Rolls Royce flying

Based purely on capital gains, the clear steering wheel of Rolls-Royce Shares has obviously been a poor decision on the part. The price has risen 53% year-to-date (as I type) with the market embracing new CEO Tufan Erginbilgic’s no-nonsense approach to turning things around.

Put another way, I would get £530 for every £1000 I would spend on the engineer, excluding the cost of buying the stock.

This makes the company one of the best players FTSE 100 (up 2.5% in 2023 (again, as I type)) and, indeed, the UK market as a whole.

Of course, the owners will not receive a dividend – Rolls has not paid this in years – but I doubt they will complain.

Can it last?

The answer, of course, is that no one knows. But let’s engage in harmless speculation.

On the one hand, the new trading has been encouraging with the company recently revealing an underlying operating profit of £652m for 2022. That is 36% higher than the figures analysts were banking on (£478m).

Unsurprisingly, this has shaken the market’s view of Rolls. Investment bank UBS, for example, recently posted a 200p target for the stock. If China’s reopening goes better than expected — and more flights take place on planes equipped with the company’s engines — this may prove conservative.

On the other hand, I suspect some traders are itching to bank some profit. The general rise in UK share prices that has been seen over the past few months may be a temporary respite and supply chain issues may affect business activity.

So, Rolls-Royce shows can it may fall from here even if the company does everything right.

But none of the above helped me make a decision on whether to buy. Here’s what he did.

A quality business?

As a Fool, I’m in the business of buying, well, big business. I also want to hold them for a long time. This puts me in the same camp as Warren Buffett and the UK’s own Terry Smith, although only in terms of mentality rather than wealth.

However you shake a stick, members of the FTSE 100 have not performed well over a longer period of time. Look at stock price performance over the past five or 10 years for evidence.

My reasoning for this is simply that Rolls does not exhibit the hallmarks of ‘quality’ that help drive growth. Operating margins are quite thin and sometimes negative. There is a lot of debt on the balance sheet. Most importantly for me, the return on capital – what the company produces as a result of the money put to work – is constantly and woefully low.

So, as encouraging as the recent performance has been, this does not strike me as a ‘set and forget’ stock. For that reason, I still wouldn’t buy Rolls-Royce shares.

However, thanks to everyone who has been able to ride the positive momentum so far.