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
Profitability Ratios →From the research
What Three Years of a Cash Flow Statement Reveals That One Year Hides
A single year of cash flow is a snapshot. Three years is a story. Learn what the trend reveals about earnings quality, funding, and sustainability.
ValuationComparing Two Companies on ROE, and Why the Higher One Is Not Always Better
Two companies can report the same ROE for very different reasons. DuPont analysis shows why an ROE built on leverage is not the same as one built on quality.
ValuationWhat a High P/E Actually Implies, and When It Is a Trap
A high P/E is not simply 'expensive'. It is the market pricing in expectations. Learn how to read what a P/E implies, and the two traps that catch beginners.