Operating Leverage
How much profit amplifies (up or down) when sales change, driven by the mix of fixed vs. variable costs.
What it is
Operating leverage measures how sensitive a company's operating profit is to changes in revenue. A business with high fixed costs and low variable costs has high operating leverage: once it covers its fixed costs, additional sales drop heavily to the bottom line. A business with mostly variable costs has low operating leverage, with profit moving more gently in line with sales.
Why it matters
High operating leverage magnifies the upside in good times but also magnifies losses when sales fall, making earnings more volatile and more exposed to a downturn. Understanding it helps you anticipate how a company's margins might swing as revenue rises or contracts.
How it's calculated
The degree of operating leverage compares the percentage change in operating income (EBIT) to the percentage change in revenue; a reading of 2 means operating profit moves roughly twice as fast as sales.
How Quintarthai uses it
You can gauge operating leverage by watching how operating margin expands or contracts versus revenue on the Financials 10-yr and Ratios tabs of a company's deep-analysis page — open a company page.