← Business Metric: Financial (all topics)
Operating leverage
What it is
The extent to which costs are fixed rather than variable. Where fixed costs dominate, a small change in revenue produces a much larger change in operating profit, in both directions
It is why some businesses swing from loss to strong profit on modest volume recovery
Impact on industries
- Amplifies profit growth once fixed costs are covered, so incremental revenue converts to profit at very high rates
- The amplification is symmetric - a revenue shortfall has no variable-cost offset, which is how highly geared businesses fail quickly
- It is measurable and plannable: knowing the break-even point tells management exactly how much volume protects solvency
- It compounds with financial leverage - a business with both high fixed costs and high debt has very little tolerance for error