When the employees of Rolls-Royce Holdings Plc read that coronavirus lockdowns and home-working have ignited a technology boom, they could be forgiven for weeping.
The company makes the jet engines that power large passenger jets, which is one of the most technically complex engineering tasks known to man. And yet, most of Rolls-Royce’s products are grounded right now because hardly anyone’s flying. The British manufacturer revealed the devastation inflicted on its business by Covid-19 travel restrictions: The 5.4 billion-pound ($7.1 billion) loss for the six months to June was one of the biggest profit shortfalls in UK corporate history.
A separate announcement that Rolls-Royce’s chief financial officer, Stephen Daintith, is jumping ship
to Ocado Group Plc, an online grocer, compounded the gloom. It’s depressing that e-commerce is seen as a better destination than advanced engineering.
But you can’t blame Daintith for grabbing a parachute. Ocado’s shares have doubled this year, valuing the company at almost 19 billion pounds. Rolls-Royce — the pride of British manufacturing — is worth a quarter of that, having lost two-thirds of its value in eight months. Technology companies aren’t all equal in this market.
Incredibly, the 5.4 billion-pound loss wasn’t even the most troubling number in Rolls-Royce’s financial statement. Its balance sheet liabilities now exceed its assets by 8 billion pounds.
This partly reflects big swings in the value of currency derivatives, rather than the underlying health of the business.
Nevertheless, the massive net liabilities are by far the largest of any European company, according to Bloomberg data. It’s a terrible look for a company that spends years developing new engines, and then makes most of its money from long-term service agreements.
Customers need to be confident that it will be around to meet those maintenance obligations.
While Rolls-Royce’s airline customers have their own pandemic problems, they’ve good reason to worry about the financial health of a key supplier. When the coronavirus crisis is over, Rolls-Royce will need to invest heavily in new technology that cuts carbon emissions. It doesn’t have the balance sheet to do that.