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Finance
Operating Leverage
The degree to which a company’s operating costs are fixed rather than variable — high operating leverage means profits rise or fall sharply with sales.
High operating leverage amplifies both good and bad results. It is great in growing markets but dangerous in downturns. Companies calculate their degree of operating leverage to understand risk.
It's like having a big fixed rent — once you cover it, every extra sale drops almost straight to profit.
Real world: A software company with high fixed costs (salaries, servers) has high operating leverage. Once it covers those costs, each new subscriber adds almost pure profit. A restaurant with mostly variable costs (food) has low operating leverage.
💡 High operating leverage is a powerful accelerator — but it works in both directions.