Operating Leverage

Operating leverage measures how sensitive operating profit is to a change in sales volume. A business with mostly fixed costs (heavy equipment, salaried staff, long leases) has high operating leverage: a small sales increase drops disproportionately to profit, but a small sales decline hurts disproportionately too, since fixed costs don't shrink with revenue.

A business with mostly variable costs has low operating leverage — profit grows and shrinks roughly in proportion to sales, with less amplification in either direction. Neither is universally better: high operating leverage rewards growth aggressively but punishes a downturn just as aggressively, which is why it matters most as a risk question, not just a profitability one.