What is operating leverage?
Operating leverage is a measurement of how revenue growth translates into growth in operating income, ultimately tracking the risk and volatility of a company's operating income. The greater the operating leverage, the higher the potential of danger from forecasting risk.
Where have you heard about operating leverage?
Operating leverage is a commonly used term in the finance world. An example of an industry with a high operating leverage would be the pharmaceutical industry, which spends a lot of money developing a product, but little money producing it.
What you need to know about operating leverage.
Operating leverage has a number of uses including calculating the break-even point. As represented in the example above, companies with a high operating leverage do not incur increased expenses with increased sales. An example of a company with a low operating leverage would be a software company experiencing greater fixed costs in paying developers, but lower variable costs from sales.
The formula for operating leverage is:
quantity x (price - variable cost per unit) / quantity x (price - variable cost per unit) - fixed operating cost
Find out more about operating leverage.
Explore related terms by reading our definitions of revenue growth, operating income and break-even point.