Operating Leverage
Profitability RatiosThe sensitivity of operating profit to changes in revenue, driven by the share of fixed costs. High fixed costs mean small revenue changes produce large profit swings.
Formula
Degree of Operating Leverage = % Change in EBIT / % Change in Revenue
Why it matters
It explains why cyclical, capital-heavy businesses see profits collapse in downturns and surge in recoveries, and why their earnings deserve a lower multiple.
Indian example
Related terms
Learn the concept
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