Operating Leverage
The degree to which a company's fixed costs amplify the effect of a revenue change on its operating profit.
Formula
Degree of Operating Leverage = Percentage Change in Operating Profit / Percentage Change in Revenue
Unit
ratio (x, times)
In depth
A business with high fixed costs sees profit rise much faster than revenue on the way up and fall much faster on the way down, which is why cyclicals swing so violently. Operating leverage is a property of the cost structure, not a management decision made each year, so it should be assumed to work symmetrically. It is frequently confused with financial leverage, which arises from debt and interest rather than from fixed operating costs — a company can have plenty of one and none of the other. Combined, the two multiply, which is how a modest revenue decline becomes a loss.
Worked example
Fixed costs ₹300 crore, variable costs 50% of revenue. At ₹1,000 crore revenue, operating profit = 1,000 - 500 - 300 = ₹200 crore. A 10% revenue rise to ₹1,100 crore gives 1,100 - 550 - 300 = ₹250 crore, a 25% profit rise — a degree of operating leverage of 2.5.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Operating Leverage” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.