Rolls Royce reveals £652m profit but engineering giant continues to ‘burn through cash’

Rolls Royce, the British aero-engine manufacturer,  unveiled profits of £652m in 2022, £238m higher than the previous year.

The increase, which was driven by its civil aerospace and power systems divisions, also reported free cash flow of £505m versus an outflow of £1.5 billion in the prior year.

Charlie Huggins, head of equities at Wealth Club, said: “It’s not uncommon for a new CEO to do some kitchen sinking. But when the incoming leader describes the existing business as a ‘burning platform’ you know you have serious issues.

‘Every investment we make we destroy value’, according to new CEO, Tufan Erginbilgic. Based on Rolls Royce’s performance over the last decade it’s hard to disagree.

“A business like Rolls must spend large amounts upfront to secure long-term maintenance contracts. This means it has to wait many years for the cash to roll in. And if anything disrupts those cash flows – like a global pandemic– you can easily spend more than you get back, especially if you invest unwisely in the first place.”

“Rolls Royce has burned through cash at a rate of knots over the last decade. That clearly isn’t sustainable. Significantly improving Rolls Royce’s cash generation has to be the number one priority for the new CEO.

Transforming Rolls Royce will be far from easy. The capital intensity of the business won’t go away. And while tackling the extreme complexity and inefficiency is a start, it probably won’t be enough. A cultural transformation is also required, and that always takes time.

“The good news for the new CEO is that no one is really expecting miracles. Investors have endured years of severe turbulence – and many have already headed for the emergency exits. If the new pilot can at least avoid a crash landing, it would be a good start.”