How sensitive operating income is to changes in revenue. High operating leverage means small revenue increases produce large profit increases - and vice versa. Companies with high fixed costs exhibit high operating leverage.
Formula
Description
Measures how sensitive operating income is to changes in revenue. High operating leverage means a small increase in revenue produces a large increase in profit (and vice versa). Companies with high fixed costs relative to variable costs exhibit high operating leverage.
Interpretation
1-2x is moderate. Above 3x means profits are highly sensitive to revenue changes, which amplifies both gains and losses. Negative operating leverage (profit falls while revenue grows) is a serious red flag for cost management.
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