Summary
Operating Leverage measures how changes in revenue affect operating profit. Companies with high operating leverage usually have a larger proportion of fixed costs compared with variable costs.
This means profits may rise faster when revenue grows, but may also fall faster when revenue declines.
Why it matters
Operating Leverage helps investors understand both growth potential and business risk. A company with high operating leverage may benefit strongly from rising sales because fixed costs remain relatively stable.
However, the same cost structure can create pressure when revenue weakens.
How it is calculated
Operating Leverage = Percentage Change in Operating Profit ÷ Percentage Change in Revenue
How to read it
Higher operating leverage means operating profit is more sensitive to revenue changes. Lower operating leverage means profit may be more stable but may not increase as quickly when revenue grows.
Investors should review this metric together with margins, cost structure, and revenue trends.