Rolls-royce targets £1bn cash flow by 2020

ROLLS-ROYCE has set out a massive financial overhaul to tackle long-standing worries in the City about its financial performance.

Investors welcomed the strategy detailed by chief executive Warren East at an investor day, with the shares surging 7.6pc to 950p.

Analysts have long complained that Rolls’s performance is almost impossible to understand.

Mr East has previously said that traditional profits is not the measure to judge the company by, instead insisting that free cash flow (FCF) – how much cash a company generates after spending to keep the business running, gives a better picture.

He has set a target of £1bn of FCF by 2020, up from what he called the “exceedingly poor” level of about £300m last year, adding that this year’s £450m target is likely to be hit.

Addressing investors yesterday Mr East said Rolls was on course to hit the £1bn target, helped by the 4,600 job losses announced on Thursday and despite revealing an extra £100m of costs in sorting out reliability issues with the company’s latest engine.

City estimates had previously put the price of sorting out the problems with its latest Trent 1000 engine at £1bn, but Mr East said it was working through solving the issues faster than it had previously anticipated.

Explaining the new metrics Rolls will use to measure performance, finance chief Stephen Daintith said the company will now focus on measuring cash flow per share, which it wants to lift from the current level of 15p to £1 in the midterm, and cash flow return on invested capital, which it aims to raise from 9pc now to 15pc.

Rolls’s statutory profits have been skewed in the past by its huge “hedge book” of investments intended to protect it from swings in currency.

Although Rolls reports in sterling, the aerospace industry works in US dollars, meaning it needs to take account of this.

The impact of the swings in currency and the value of its hedge book mean that on a statutory level it reported a £4.9bn pre-tax profit last year, compared with £4.6bn loss the year before, despite revenues remaining being broadly the same.