operating leverage

Operating leverage refers to how a company's fixed costs (expenses that don’t change with sales volume) affect its profitability as sales fluctuate. High operating leverage means that a small increase in sales can lead to a large increase in profit because fixed costs are spread over more sales. Conversely, with low operating leverage, profits are less sensitive to sales changes, as variable costs (that change with sales) dominate. Essentially, operating leverage measures the risk and potential reward from a company's cost structure, highlighting how sales changes impact overall profitability.