A company I wrote off that quietly turned itself around

A few years ago I thought Rolls-Royce was a mess. Today it's making real money again, paying down its problems, and handing cash back to shareholders. After looking through the numbers, I don't think the share price has fully caught up yet and here's why.

The Short Version

• The business is in much better shape. Last year (2025), sales grew 12% to about £21 billion, and profit more than doubled to roughly £5.8 billion. A few years ago this company was struggling to stay above water. That's a big change.
• The shares still look cheap to me. At about £11.40 each, you're paying around 16 times last year's earnings. Similar aerospace and defence companies trade closer to 24 times. For a business doing this well, that gap is what made me look twice.
• The experts mostly agree there's room to rise. I checked what professional analysts think the shares are worth. On average they land around £14.27, roughly 20% above today's price. The optimists say £17+, the cautious ones say closer to £9. I'm not just copying them, but it was reassuring that I wasn't the only one seeing value.
• One honest catch: even the optimists expect profits to dip a bit over the next few years, because last year's profit margins were unusually high and will likely settle down. So this isn't a "profits go up forever" story. It's a "the company is bigger, cleaner, and deserves more credit" story.
• Management is putting money where its mouth is. The company is buying back up to £2.3 billion of its own shares (which makes each remaining share worth a bit more), and the dividend is back and growing.

What Rolls-Royce Actually Does

Rolls-Royce has been around since 1884 and employs about 43,000 people. Forget the luxury-car name — that's a separate company. This Rolls-Royce makes engines and power systems. It does three main things:

• Plane engines. It builds the big engines on large passenger jets — and, just as importantly, it gets paid for decades to service and maintain them.
• Defence. Engines and power systems for the military, with a healthy stack of orders.
• Power systems. Equipment that generates power — increasingly for the data centres that run the internet and AI.

I'll be honest: a few years back I had this in my "interesting but broken" pile. The company owed more than it owned and there were real worries about whether it could keep up with its debts.

What changed my mind was watching the fix actually happen. The boss, Tufan Erginbilgic, sold off bits that didn't fit and focused the company on making money and generating cash. Now it has more cash than debt, and a major credit agency upgraded its rating, something that simply doesn't happen to a company in trouble.

My Take: A Better Business, A Price That Hasn't Caught Up

Here's my thinking in one sentence: the company is genuinely healthier, it's giving money back to shareholders, and the shares are still priced below what most experts think they're worth.

The "healthier" part is easy to see in the results:

• 2025: sales up 12% to ~£21 billion, profit up 132% to ~£5.8 billion.
• The balance sheet: more cash than debt, and a credit-rating upgrade.

The "price hasn't caught up" part is what the rest of this is about.

Why It's Working (1): The Repair-and-Service Business

The part doing the quiet heavy lifting isn't selling brand-new engines — it's servicing the ones already flying. Once an engine is on a plane, Rolls-Royce gets paid to maintain it for years. With more planes flying again, that steady, repeat income has become a real money-maker.

The catch I keep in mind: a lot of this came from air travel bouncing back after the pandemic. That pace will eventually cool off. But the basic setup — long contracts, lots of engines already out there, money coming in year after year — is sturdy, and that's what gives me comfort.

Why It's Working (2): Power for Data Centres

The piece I think people overlook is the power-systems business. Demand has jumped because data centres — the buildings full of computers behind the internet and AI — need huge, reliable amounts of power. That's been growing fast, and if it keeps up, this part of the company could do better than people expect.

My honest worry: a good chunk of the optimism assumes this keeps booming. If data-centre spending slows down, this is the part that would disappoint first. So I'm watching it, not banking on it.

Why It's Working (3): The "Bonus" Bets

There are two longer-term projects I treat as nice-to-haves rather than things I'm counting on:

• Mini nuclear reactors. Rolls-Royce is an early leader in small, factory-built reactors that could become a whole new business in the 2030s.
• A next-generation engine that could be more efficient than today's models.

These are exciting but still years away and expensive to develop, so I refuse to assume they'll pay off. If they do, that's upside on top of a story that already works without them.

What I Think It's Worth

Let me be upfront about how I got here. I didn't build some complicated model, I looked at what the professional analysts think the shares are worth, checked the assumptions behind those numbers, and asked myself whether they seemed sensible.

Right now the shares trade at about £11.40, or roughly 16 times last year's profit, cheaper than the typical aerospace and defence company at about 24 times.

When I lined up the expert estimates, here's roughly what I saw:

The important thing buried underneath those numbers: the experts actually expect profit to drift down a little over the next few years, because last year's profit margins were unusually high and will probably settle back to normal. Even so, they still think the shares are worth more than today's price , because the company is bigger, cleaner, and deserves to be valued more generously.

That matches how I see it. I'm not betting on profits shooting higher from here. I'm betting that Rolls-Royce keeps growing its sales, keeps buying back its own shares, and slowly earns more respect from the market for being a better, safer business than it used to be. That's a good bet for me, because it doesn't need everything to go perfectly.

What Could Prove Me Wrong

I always try to argue against myself. Here's what genuinely worries me:

• Profit is expected to dip, not climb. This is the single most important thing to understand. My case only works if growing sales and a higher valuation make up for it.
• The recovery might be more of a bounce than a trend. If air travel or data-centre spending cools faster than expected, the momentum fades.
• The exciting future projects could be delayed. Mini reactors and new engines are early and costly. I'd rather be pleasantly surprised than depend on them.
• The world could move away from traditional engines. Over the long run, a big shift to electric or hydrogen planes could eat into the core business.
• A lot of good news is already priced in. The shares are up about 40% in a year and many times over the past few years, and they swing around a lot. I'm not claiming I found this early — I'm saying I think there's still more to come.

Bottom Line

The way I see it, Rolls-Royce already did the hard part: it cleaned up its finances, started making strong profits, built up cash, got a credit upgrade, brought back the dividend, and is buying back billions in shares. Yet the share price still looks cautious for a company in this shape, and when I checked the experts' estimates, most of them agreed there's room to rise.

What I'm not doing is pretending profits will keep climbing forever and they probably won't, and the experts agree. My bet is simpler: steady sales growth, fewer shares outstanding, and a market that eventually gives this company the credit it has earned. If that plays out, I think there's more upside ahead. If it doesn't, I'll be wrong so it makes send to keep my position a sensible size.

I'd love to hear the other side, especially from anyone who thinks those shrinking profit margins are a bigger problem than the market is letting on.