Image source: Rolls-Royce plc
What should a company do when it has accumulated large debts in times of crisis? You need to increase revenue and reduce costs.
So doing exactly that will give you Rolls-Royce holdings‘ (LSE: RR.) share a new impulse? I think it could be.
On October 17, the aircraft engine maker revealed its latest restructuring plans. Unfortunately, they include the loss of between 2,000 and 2,500 jobs, out of a global workforce of around 42,000 people. But, given the circumstances, I think it could have been much worse.
Recovery plans
It is all part of the plans of the CEO, Tufan Erginbilgic, of “Build a high-performance, competitive, resilient and growing Rolls-Royce..”
The firm will also combine some management areas, as a way of “eliminate duplication and deliver profitability.”
When I see a big FTSE 100 If a company is serious about costs, debt and financial efficiency, it is a breath of fresh air.
Address debt
I shake my head when I see a large company racking up enormous debt without seeming to care much. And when I see big dividends at the same time, I shudder.
I’m thinking about Vodafone and BT Group in particular here. Both were much more resilient in the face of the pandemic crisis, so they have that going for them. And maybe it’s not fair to compare such different businesses.
Still, at last count, Vodafone reported net debt of £33.7bn. BT’s looks considerably lower, at £18.9bn, but that doesn’t include its chronic pension deficit.
This makes Rolls-Royce’s net debt of £2.8bn, as of June, look like chump change.
Good administration?
What did Peter Drucker, one of the pioneers of modern management theory, say? Was…
The management is doing things well; Leadership is doing the right things.
Peter Drucker
So I have to ask: are the leaders at Rolls-Royce doing the right thing? From the depths of the recent crisis, they appear to have focused on addressing the company’s debt.
I think that’s exactly the right thing to do and it gives me confidence about how they could manage my money if I ever bought Rolls-Royce shares.
The right direction?
But if we think about the first part of that quote, are they doing it the right way?
Well, layoffs reduce costs, at least in the short term. And that’s good for debt management.
But they don’t exactly help create a positive work environment. The planned job cuts are probably a necessary evil. But I would like to see it completed as soon as possible and fears of further cuts to subside.
Still, since the dark days of 2020, I believe Rolls-Royce’s management approach has been of the highest quality. And so far, the recovery has been much faster than I expected.
Is it time to buy?
At the moment, it seems to me that there is already enough optimism in the valuation of Rolls-Royce shares. A price-earnings ratio (P/E) expected for the entire year 30 does not seem like a spectacular purchase to me.
Still, I think 2024 could be a year of further progress and I’m keeping an eye on any near-term price drops.
