economy
What is operating leverage?
Nov 26, 05:11
Costs can be fixed or variable. For example, usually salaries are a fixed cost while freight is variable. When the share of fixed costs is higher, when sales increase costs don't increase by as much. That leads to operating leverage, as more sales translates to higher margins. But when variable costs have a higher share then margins may remain the same or not improve as much. To illustrate, a software product should enjoy a high operating leverage whereas a cement company will not. Ordinarily, investors prefer companies with a higher operating leverage but this is only one of several investment indicators.
