How much profit moves for a given move in revenue, driven by the share of costs that are fixed. High operating leverage cuts both ways.
Measure it as the percentage change in operating-income divided by the percentage change in revenue. A reading of 3 means every 1% of revenue growth produces 3% of profit growth, and every 1% of decline produces a 3% fall.
It is distinct from financial-leverage, which comes from debt. A company can have both, and the combination is what turns a modest demand slowdown into a covenant problem.
Example: Northwind grows revenue 8% from $778M to $840M while operating income grows 26% from $95M to $120M. Operating leverage is about 3.3, which is comfortable on the way up and dangerous if revenue ever falls.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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