Definition
Operating leverage measures how sensitive operating income is to revenue changes. High fixed costs create high operating leverage: small revenue increases generate large profit increases, but revenue declines cause outsized profit drops. It's a measure of business model risk.
Formula
Degree of Operating Leverage = % Change in EBIT / % Change in Sales
Example
If 10% revenue growth causes 30% EBIT growth, operating leverage is 3x. Airlines have high operating leverage (fixed planes); consulting firms have low leverage (variable labor).
FAQ
What is Operating Leverage?
The degree to which fixed costs amplify changes in operating income.
How do you calculate Operating Leverage?
A common formula for Operating Leverage is: Degree of Operating Leverage = % Change in EBIT / % Change in Sales
Why is Operating Leverage important?
Operating Leverage helps investors evaluate fundamental analysis and make more informed decisions.