Operating Leverage

Operating Leverage refers to the extent to which a company can increase operating income by increasing revenue. It measures how fixed and variable costs affect profitability as sales fluctuate. Companies with high fixed costs relative to variable costs tend to have high operating leverage, meaning small changes in revenue can lead to significant changes in operating income.

Formula: Operating Leverage = Contribution Margin / Operating Income

Higher operating leverage indicates that a business can significantly increase profits with a modest increase in sales, though it also means higher risk during revenue declines.