Operating leverage measures how sensitive a company's operating profit is to changes in revenue. High fixed costs relative to variable costs create high operating leverage — a small revenue increase produces a large profit increase, and vice versa.
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Pro Tip
High operating leverage is a double-edged sword. It amplifies gains in good times but magnifies losses in downturns. Companies with high leverage need conservative balance sheets.
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Did You Know?
Airlines have extremely high operating leverage — fixed costs (aircraft, staff, gates) are massive. A 5% revenue drop from an empty seat can wipe out most profit; a 5% increase can double profits.
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