Reading the accounts
Operating leverage
How much profits amplify revenue changes, because some costs stay fixed as sales move.
How it works
A company with high fixed costs sees profits rise sharply once revenue passes breakeven, because each extra sale carries almost no additional cost.
The same mechanism works brutally in reverse. High operating leverage means a modest revenue decline can wipe out profit entirely.
Worked example
A business with $80m fixed costs and 60% gross margins breaks even at about $133m of revenue. At $160m it makes $16m; at $110m it loses $14m.
Related terms
- Operating marginOperating income as a percentage of revenue — how much of each sale survives running the business.
- Fixed costsCosts that do not change with how much a company sells, at least in the short run.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
- BreakevenThe level of sales at which revenue exactly covers costs and profit is zero.
Mentioned in
More in Reading the accounts
- Operating income
- Organic growth
- Owner earnings
- Operating cash flow
- Return on equity
- Off-balance-sheet
- Return on invested capital
- Net margin
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.