£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

The returns Rolls-Royce (LSE:RR) shares have generated since the end of the pandemic are hard to ignore. Over the last five years, the stock’s up 728%.

That’s enough to turn a £10,000 investment from April 2020 into £82,812 today. And while the end of Covid-19 travel restrictions have been a big help, there’s more to it than this.

Rolls-Royce

It’s easy to attribute Rolls-Royce’s success to the recovery in travel demand. And there’s no doubt an increase in engine flying hours has been a big part of the story.

Increased demand for engine servicing has caused a recovery in revenues and profits. This in turn has allowed the company to reduce the debt on its balance sheet, bringing down interest costs.

Rolls-Royce has gone from paying £476m in interest on its borrowings in 2022 to £245m in 2024. And this has further boosted profitability and free cash flow generation.

It’s too simplistic though, to say the stock has gone from 86p to £7.15 over the last five years because of the end of the pandemic. Not every business that was affected in the same way has managed a similar recovery.

Carnival

Carnival‘s (LSE:CCL) another stock that struggled badly during Covid-19. And while the share price is 104% higher than it was five years ago, it hasn’t reached Rolls-Royce levels.

Carnival’s operating profits in 2024 were higher than they were in 2019. But the firm has almost three times as much long-term debt, which means a lot of that income goes on interest payments.

As a result, earnings per share are around a third of what they were before the pandemic. And that’s why the stock hasn’t managed the same sort of recovery as Rolls-Royce.

I think Carnival’s performance is an indication that Rolls-Royce’s recent success hasn’t just been the result of travel restrictions lifting. There’s been something more going on.

CEO

As well as the effects of the pandemic unwinding, Rolls-Royce has benefitted a lot from a dynamic CEO. Tufan Erginbilgiç has done a lot for the firm since joining from BP in 2023.

Changes have included shifting away from assets that generated weaker returns, such as ITP Aero (sold) and Rolls-Royce Electrical (ceased). This has improved the firm’s overall returns.

Erginbilgiç has also renegotiated Long-Term Service Agreements where the company services engines for a fixed fee. These can be unprofitable if costs exceed the value of the contract.

Rolls-Royce’s performance has been driven in large part by the firm’s internal transformation, not just an easier trading environment. And this is important from an investment perspective.

Buy low?

Rolls-Royce shares have been outstanding over the last few years. And Covid-19 restrictions lifting by itself doesn’t fully explain why this has been the case.

This has however, been an important part of the story and I think the place to look for opportunities right now is in sectors that are going through short-term challenges.

That’s what I’m doing. I’m not saying the Rolls-Royce share price can’t go higher from here, but I don’t see this as an obvious time to be thinking about buying the stock.

The post £10,000 invested in Rolls-Royce shares 5 years ago is now worth… appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.