HOMEPAGE

Operating Leverage

Definition

Operating Leverage measures how sensitive a company’s operating income is to changes in revenue. It reflects the proportion of fixed costs in the cost structure.

$$\text{Degree of Operating Leverage (DOL)}=\frac{\mathrm{\%}\text{ Change in Operating Income}}{\mathrm{\%}\text{ Change in Revenue}}$$

Why It Matters

• High operating leverage means small revenue changes create large profit swings.
• Low operating leverage means profits move more steadily with revenue.
• Critical for understanding business risk and earnings volatility.

How to Interpret It

• High DOL:
  • High fixed costs
  • Greater earnings volatility
  • Strong upside in growth periods
• Low DOL:
  • More variable costs
  • More stable earnings
  • Less sensitivity to downturns

Example

If revenue rises 5% and operating income rises 10%:

$$\text{DOL}=\frac{10\mathrm{\%}}{5\mathrm{\%}}=2$$

A DOL of 2 means operating income grows twice as fast as revenue.