Rolls-Royce Earnings: Higher Durability and LTSA Cash Underpin Target Upgrade

Key Morningstar Metrics for Rolls-Royce Holdings

What We Thought of Rolls-Royce Holdings’ Earnings

Rolls-Royce reported 2025 operating profit of GBP 3.5 billion, up sharply year on year, with free cash flow of GBP 3.3 billion and a return on capital of 18.9%. The company raised its 2028 midterm targets and announced a GBP 7 billion–GBP 9 billion share buyback.

Why it matters: Rolls-Royce’s results mark an inflection point as improved contract economics and operational execution translate into structurally higher profitability and cash generation. A young, expanding fleet and repriced service contracts support a more durable aftermarket earnings base.

• Engineering upgrades across Trent XWB, Trent 1000, Trent 7000, and Pearl extend time on wing and reduce the frequency and costs of shop visits. The durability target rises to over 100% from over 80%, increasing profit and cash per engine and lifting the LTSA lifetime value.
• Higher midterm targets reflect structurally higher aftermarket margins, improved contract mix, and stronger power systems’ profitability. Only around a quarter of incremental LTSA cash is realized by the midterm, supporting the GBP 7 billion-GBP 9 billion multiyear buyback.

The bottom line: We substantially lift our Rolls-Royce fair value estimate to GBX 1,520 from GBX 1,120, supported by longer-duration aftermarket strength, higher engine spares and services mix, improved cash conversion, and higher durability assumptions with time on wing.

• We increase civil aerospace revenue and EBIT margin to reflect higher engine flying hours, better pricing per flying hour, and fewer shop visits (thanks to improved durability), lifting long‑term service margins and contract cash flows, and supporting around GBP 5.2 billion of free cash flow in 2028, close to management’s GBP 5.0 billion-GBP 5.3 billion target.
• We raise our power systems margin assumptions as higher‑value data center and government projects, together with a scaling battery energy storage systems business, increasingly drive the mix on a leaner cost base, supporting high‑teens EBIT margins.