What it is
Operating leverage is a financial metric that indicates how sensitive a company's operating income is to changes in its sales revenue. It's determined by the proportion of fixed costs versus variable costs in a company's cost structure. Companies with high operating leverage have a greater percentage of fixed costs. This means that once fixed costs are covered, a small increase in sales can lead to a disproportionately larger increase in operating income.
High operating leverage can amplify both gains and losses. In a growing economy or with increasing sales, it can lead to rapid profit expansion, making the stock attractive to growth investors. Conversely, during economic downturns or periods of declining sales, it can result in steep profit declines or even losses, as fixed costs remain constant. Investors often analyze operating leverage when assessing a company's risk profile and its potential for earnings growth or contraction.
Why it matters
High operating leverage can supercharge profits with rising sales but also magnify losses if sales decline. It helps you assess risk and growth potential.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice