Will the Rolls-Royce share price crash in 2023?

At Rolls-Royce Holdings (LSE: RR.) share price has risen 40% in the day since full-year results. So we certainly won’t see a crash in 2023, right?

I don’t think we are likely, no. But there are dangers, and investors should not just assume it’s only up from here. There really could be more volatility ahead.

Find out the price of Rolls-Royce shares in October 2021. But it continues to fall by more than 50% in the next 12 months.

It may not be sudden, but it’s a proportional drop in the accident rate, that’s for sure. Could it happen again? Yes, I think it works. Let me explain what I think.

The problem doesn’t go away

Things have been going well for Rolls-Royce over the past year. The problem is simple, obviously. But the problem certainly hasn’t gone away.

Look at debt, for example. Last year, Rolls managed to reduce its net debt from £5.2bn to £3.3bn. That’s massive. But it is mostly financed by disposal, and it is not sustainable.

The same disposal will not happen next year. What if we don’t see enough cash generation to make it, and the debt doesn’t fall as fast as we hope? Well, investor sentiment can change quickly.

Pay off debt

The debt situation aspect of Rolls makes me optimistic. The company paid off a UK Export Finance backed loan of £2bn in September 2022, which will not be repaid until 2025. This shows two things that I am very happy about.

One is that paying off debt is a high priority. In the same situation, I’m sure some would hang up on a profitable loan and use the money for other things. Maybe even pay premature dividends to sweeten big City investors.

Cash flow

It also suggests confidence in recovering cash flow, and the company’s operations will hopefully generate the necessary funds.

In fact, the Rolls-Royce board expects to rake in between £0.6bn and £0.8bn in cash flow in the current year. I find that impressive at this stage recovery aero engine maker.

But there is still a long way to go, and investors should be patient. Now, we are seeing a happy reaction to the results that are better than expected. That’s what you want. And shareholders should be happy.

Waiting for the game

But sentiment is changing, and the waiting game may not be so fun. What if the cash flow recovery is below expectations? It may still be good, but shareholders can throw it back.

I show Rolls-Royce will really start to look safe if progressive dividends are reintroduced, and when we see a strong cover by earnings and a sustainable outlook.

I believe it will happen, maybe sooner than expected. And puts the shares on the potential long-term buy list. But this danger has not disappeared, and I think investors should be prepared for other ups and downs.