What's going on?

Rolls-Royce, the British engineering firm, said its profits next year would be a lot less than expected � and the stock responded by selling off 20%. The company has lost half of its value since April!

What does this mean?

First of all, Rolls-Royce is not the company you might think it is. It doesn�t (anymore) produce those fancy cars � that is actually done by BMW, which licenses the Rolls-Royce brand. What it does is produce aerospace engines � it�s one of the largest producers of those in the world. Even more surprisingly, it doesn�t actually make any money from selling airplane engines � it sells them at a loss and then makes its money by servicing those engines over their lifespan. So the recent boom in new, long-haul aircraft�has actually hurt Rolls, as older planes that cost more to service were being retired. There have been other problems, but the biggest problem is that it is left with high costs and declining revenues.

Why should I care?

The bigger picture: It has lost some credibility with investors. This is the fifth time in less than two years that Rolls has delivered a �profit warning.� That�s enough for investors to question if management really understands what�s going on with their business. They do have a new, well-respected CEO who started in July that investors are hoping can right the ship. 2. For the stock: Rolls has time to turn things around. The good news is that Rolls shouldn�t be under immediate pressure because it�s still profitable and it doesn�t have too much debt. That means that the company can take some time to implement its turnaround strategy (which largely involves cutting costs, e.g. jobs). Implementing that strategy will become key.