What Is Operating Leverage?

Operating leverage, also known as operating leverage or operating leverage, reflects the leverage relationship between sales and earnings before interest and taxes. Refers to the law that the rate of change in profit is greater than the rate of change in production and sales due to the existence of fixed costs in the production and operation of the enterprise. Operating leverage refers to the increase in production and sales volume within a certain range of production and sales volume according to cost characteristics. Generally, the increase in production and sales volume will not affect the total fixed cost, but it will reduce the fixed cost per unit product, thereby increasing the profit per unit product and The growth rate of profit is greater than the growth rate of production and sales; on the contrary, the decrease in production and sales will increase the fixed cost of the unit product, thereby reducing the profit of the unit product and making the rate of profit decline greater than the decline in production and sales.

Operating leverage

Products can only be made without a fixed cost

Enterprises can generally increase their sales, reduce the unit cost of product changes, and reduce the proportion of fixed costs.

DOL = (EBIT + F) / EBIT or DOL = Tcm / (Tcm-F)

F is fixed cost

EBIT is EBIT

Tcm is

(1) Reflect the operating status of the enterprise

Large-scale enterprises have high fixed costs, which determines that their profit rate of change is far greater than the rate of change of sales. The higher the business t, the greater the total fixed costs and the greater the operating leverage. If companies want to increase their profitability, they must continue to increase their sales so that they can obtain profits multiple times. The unit cost of change is higher, the unit price of sales is lower, the operating leverage will also be larger, and the profit margin will still be greater than the sales margin. In other words, there is no direct relationship between the ability to acquire and the speed of profit growth.

(2) Reflecting the business risks of the enterprise

In the case of higher operating leverage, when the business volume decreases, the profit will decrease by multiples of the operating leverage ratio. When the business t increases, the profit will increase by multiples of the operating leverage ratio. This indicates that the higher the operating leverage, the more drastic the profit changes, and the greater the business risk of the enterprise. Conversely, the lower the operating leverage, the smoother the profit changes, and the lower the business risk of the enterprise. Under normal circumstances, the level of operating leverage only reflects the size of an enterprise's operating risk and cannot directly represent the quality of its operating results. Under the premise of the same increase in business volume, the profit level of the company is different; but when the business volume is reduced by the same amount, the level of corporate profit decline is also different. Regardless of the level of operating leverage, increasing business is the key factor for corporate profits.

(3) Forecasting the future performance of the company

By calculating the operating leverage of an enterprise, it is possible to make reasonable predictions of the company's future profit and sales change rate and other indicators. Forecasting the company's sales by calculating the rate of change of sales during the planning period of the company is conducive to faster forecasting. At the same time, it can be treated differently, and different sales change rates can be predicted for different products, which is conducive to horizontal and vertical comparisons.

Calculate the expected rate of change in sales to ensure the realization of the target profit: Calculate by the following formula:

Change rate of budgeted sales to ensure target profit =	Target profit for the planning period-base profit
	Base period profit × economic leverage factor

Since the profit of the base period and

There are two issues that companies must pay attention to when applying the theory of operating leverage:

One is related to fixed costs

If there are fixed costs and fixed financial costs in an enterprise, there is a leverage effect. Joint leverage is a comprehensive reflection of operating leverage and financial leverage, and it directly reflects the common impact of operating leverage and financial leverage on the enterprise. Generally, companies always have fixed costs, so the analysis of operating leverage is the premise of studying joint leverage. To make good use of joint leverage, you must analyze operating leverage and financial leverage. When the risk of financial leverage increases, the risk of operating leverage is bound to be affected. The two levers are complementary, they affect each other, and there is a reciprocal relationship. Therefore, when financing and investing, they should be used in conjunction with each other to comprehensively consider their impact on the enterprise's ability to bear risk. ^[1]