Operating Leverage
Definition
The degree to which a business's costs are fixed rather than variable. High operating leverage means profits rise fast as sales grow past break-even — but fall just as fast when sales decline.
Related Terms in Financial Analysis
Variance Analysis
Comparing actual results against budget or standard figures and investigating the differences. It helps managers understand why performance differed from plan and where to act.
Horizontal Analysis
Comparing financial statement figures across multiple periods to spot trends and growth rates. It reads the accounts left to right, period over period.
Vertical Analysis
Expressing each line of a financial statement as a percentage of a base figure — revenue for the income statement, total assets for the balance sheet — to compare structure across periods or businesses of different sizes.
Common-Size Financial Statements
Statements where every line is shown as a percentage of a base amount, making it easy to compare companies of very different sizes or to track how a cost structure shifts over time.
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