Is Rolls-Royce’s share price a brilliant bargain or an investment trap?

At Rolls-Royce (LSE:RR.) This share price from 2023 FTSE 100 enginebuilder rose 15% in value since January trading began. There is also a chance to earn better profits during the month.

But I feel that the stock continues to offer good value despite recent gains. City forecasters expect annual earnings to grow 477% by 2023, a prediction that makes the company trade at a forward price-to-earnings growth (PEG) ratio of 0.1

Any reading below indicates that the stock is trading below value.

That’s not to say that Rolls-Royce shares offer particularly good value. Some stocks carry low prices due to high profit risk. So are Rolls too cheap to miss? Or what is the pitfall for investors to avoid?

China reopens

The Covid-19 restrictions unleashed in China have sent Rolls-Royce shares higher over the past month. As market analyst Susannah Streeter of Hargreaves Lansdowne has commented: “There is hope that China’s reopening will help fuel a new love for long-distance travel“.

He noted that looser rules would provide FTSE 100 businesses with a boost”its core business is manufacturing and maintaining commercial jet engines“. Asia has become the fastest growing aviation market in the past decade as the region’s wealth has risen.

Scientists with China’s Centers for Disease Control and Prevention predict that 80% of the country is now infected with Covid-19. This indicates that the current case has peaked and it is unlikely to return to the lock. But I know that a new variant of the virus could re-enter the country and disrupt air travel again.

Uncertain recovery

I also know that air traffic could sink if the global economy goes into recession. This will hurt the money Rolls-Royce makes from engine servicing, while weakening airline profits may also reduce power unit orders.

Spending on big-ticket items like vacations tends to drop sharply as the economy shrinks. Business trips are also on hold as companies try to conserve cash.

Having said that, the growing cost of living crisis cannot prevent a strong recovery in the civil aviation sector. In fact easyJet This week raised the forecast for the full year on account of the record order day in January.

Big debt

Indeed, the profit outlook for many British stocks is in jeopardy in 2023. But what may make Rolls-Royce shares riskier than most is the size of its large debt pile.

They owe 4bn worth as of September. So it takes profits to keep rolling to help pay off that huge debt. Continuous debt can consider investing in growth programs like low-emission engines. They could also block its ability to restart dividend payments.

Verdict

The share price of Rolls-Royce looks cheap on paper. But I believe the company still has too much risk today. With high cost inflation and supply chain issues threatening to persist, I’d rather buy more stocks to try and generate long-term returns.