2020 was a tough year for the Rolls Royce (LSE:RR) shares price as the stock fell to an all-time low of 34.49p in October. And the engineering firm had to let go of some of its employees to balance its books. 

The company has since made giant strides to recover from last year’s losses. Restructuring was one of the measures management took to salvage itself. And thanks to the reopening of the economy as well as the return of international travel, the Rolls Royce share price is back on the rise. Let us look at how Rolls-Royce shares have performed and where it may be heading next.

How has the Rolls-Royce share price performed over the last year?

Year to date (YTD), the Rolls Royce share price is basically flat. But over the last 12 months, it has risen by 53%. That’s significantly more than the 17% return provided by the FTSE 100. 

Despite this upward momentum, the stock remains below pre-pandemic levels. 

2021 half year results

2021 has been a significantly better time for Rolls Royce. Looking at the latest half-year results, cash flow has improved considerably, with the outflow coming in at £1.2bn versus £2.9bn in 2020. As a result, the business managed to generate an operating profit of £307m versus a £1.6bn loss last year.

Free cash flow remains negative. However, the managed team have issued guidance that it will return to the black in the second half of 2021. This is largely thanks to the massive restructuring process that is currently underway for its civil aerospace business. Whether this will be achieved has yet to be seen. But the firm looks like it’s off to a promising start.

While commenting on the half-year results, the company’s Chief Executive said, 

“Our continued focus on the elements within our control, together with a good performance from Defence and order intake recovery in Power Systems, have enabled us to deliver solid progress in the first half. The benefits of our fundamental restructuring programme in Civil Aerospace are evident in our reduced cash outflow and improved operational efficiency…”.

Personally, I think with the current level of growth and restructuring being made, Rolls Royce can transform itself back into a healthy business. Needless to say, that’s good news for the Rolls Royce share price. Having said that, there are some risks that lie ahead. 

The challenges that lie ahead for the Rolls Royce share price

Due to the recent surge in the delta variant of Covid-19, the volume of passengers for air travel has reduced. Given a large amount of Rolls Royce’s revenue stems from providing services to the travel industry, any drop in passenger traffic directly impacts the firm’s revenue stream. 

Aside from that, there are calls by some investors to sell the company’s Power business. If this division gets disposed of, overall revenues will likely suffer, resulting in a fall in the underlying business’s value, and hence its share price. To make matters more complicated, Causeway Capital, one of the largest investors in Rolls Royce, is trying to replace the entire board of directors. It’s possible that under new leadership, the company might thrive. But swapping out an entire management team with another can create problems, as well as boost uncertainty. If not handled properly, the Rolls Royce share price could be severely impacted.

Concluding Thought

The Rolls-Royce share price nosedived to its lowest point in 2020. And while it has started moving back in the right direction, the stock continues to look relatively cheap. However, due to the many challenges it still faces, this doesn’t scream value to me. And so, I’m keeping it on my watchlist for now.