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Operating leverage
From Wikipedia, the free encyclopedia
The operating leverage is a measure of how revenue growth turns into earnings growth. It can be a ratio of fixed costs to variable costs incurred to generate the revenue. Depending on the product, it can be generated by the ratio of preproduction costs (i.e. design widgets) versus incremental production costs (i.e. produce a widget).
The two, fixed costs and variable costs are the operating expenses. The ratio between the two determines how growth in revenue impacts the operating margin. If the variable costs are all the operating costs, then the operating margin would be constant as sales grow. A 10% increase in revenue generates a 10% increase in operating income. If, however, fixed costs are high, then a 10% increase in revenue will generate quite a bit more than 10% increase in operating earnings, essentially increasing the operating margin.