Share price boost by 1384%? Yes please! That kind of profit may sound like an investor’s dream, rather than the performance of blue-chip stocks in just five years. But that’s the point Rolls-Royce (LSE:RR) share price has reached.

For some investors, this means incredible returns.

In the meantime, perhaps many of us will look on and wonder how we could have missed such an opportunity!

I think a more productive approach may be to look ahead and ask what lessons we can draw from Rolls’s extraordinary stock run as we scan the stock market today for potential future stars.

Look at the market size

Five years ago, demand for civil aviation dropped dramatically. That’s why many people crossed out Rolls-Royce’s prospects.

From our perspective today, this may seem a bit strange. After all, Rolls, in addition to its immense civil aviation division, also has defense and energy divisions.

Still, the hit to civil aviation demand was critical at the time – and likely will continue to be, given its size and importance to the company.

But what many investors apparently missed five years ago was the fact that long-term demand for civil aviation would likely return to historic norms sooner or later.

It matters. The industry is immense and likely to remain so in the long term, and the barriers to entry are high.

Liquidity is key and it pays off

However, investors clearly had doubts at the time. Why?

One explanation is that they feared Rolls might run out of money before demand recovered sufficiently.

This didn’t happen without a reason. In 2020, Rolls-Royce conducted a rights issue in which it sold billions of up-to-date shares at pennies apiece to raise cash.

While this may have been painful in terms of shareholder dilution, I believe it was prudent. After all, no matter how robust a company’s fundamentals are, it must always have enough cash (or at least liquidity) to keep operating.

This may relate to the company’s current liquidity. However, when a company is beaten, it may also be significant to examine its ability to raise liquidity.

With its robust brand, installed base of engines and patented technology, Rolls-Royce was in a robust position to raise more money.

So when a company is on its knees, one of the questions I ask is not just whether it has enough money to continue operating, but also whether I think it can raise cash when it needs it.

Where is the competitive advantage?

The pointed rise in Rolls-Royce’s share price is partly due to management’s attitude and the achievement of ambitious business goals.

However, many companies set arduous goals only to find that they fall miniature of achieving their goals. What has changed at Rolls-Royce?

I think his robust management helped a lot. But at its core is a powerful brand, a customer base built over decades and engineering prowess.

In other words, Rolls has, in my opinion, a real competitive advantage. This helps explain why it not only survived the arduous period of the pandemic, but thrived.

From an investment perspective, I’m always looking for a company that will have a competitive advantage!