At £1.54, can the Rolls-Royce share price go any higher?

At Rolls-Royce Ownership plc (LSE: RR) share price was trading at just 66p as recently as November. Since then, the share price has risen to £1.54. That’s a staggering 121% leap and puts the company as the top riser in the FTSE 100 this year.

The question then: can it be higher? Well, one detail that didn’t escape my attention is that the stock price is still down more than 60% from its all-time high. It is a golden opportunity if the stock can return to its previous high. Here’s how I think it will end.

British success story

Rolls-Royce has not been short of British success stories. Between 2003 and 2013, the company’s share price increased by 1,701% and investors holding positions in the British aerospace and defense company were well rewarded.

Even today, the brand is one of the most prestigious and known around the world. Business Insider put Rolls-Royce in its ‘top 10 companies, ranked by reputation‘ along with Rolex, Disneyand Lego.

While the name is perhaps more associated with luxury cars, which are made by a different company (Rolls-Royce Motor Cars is owned by The BMW Group), the FTSE 100 stalwart derives most of its revenue from its civil aerospace division, where it manufactures and provides aftermarket care for aero engines. And here the problem begins.

eye debt

In 2020, the Covid-19 pandemic brought air travel to a halt. This was a disaster for Rolls-Royce as revenue fell but liabilities did not disappear. Companies have running costs and they have to pay them.

The data shows that the company is racking up debt to keep the lights on. And clearing that debt will be the first step to increasing the share price.

Can the stock price go any higher?

So this brings us to today. International travel is back to normal, so profits are up, and new company earnings show that debt is paying off. Here’s what the debt and income figures are if we add 2022.

Income and debt look healthier. And that explains why the stock price jumped 42% last week after the acquisition.

The bad news? The debt was repaid with the help of the £1.5bn one-off sale of ITP Aero. While it is good to know that paying off debt is a priority, selling off assets is not a sustainable way to reduce debt.

A strong brand and increasing revenue tell us that the stock price will be higher in the long term, possibly returning to its highs in the next few years. But I don’t think it will be a quick process.

Earnings per share were just 2p. If we compare it with the share price of £1.54, we get a price-to-earnings ratio of 77. It is expensive compared to the FTSE 100 average of around 14, and it means that I would not rush to invest myself.