Operating leverage

What it means

The sensitivity of operating income to a change in sales, driven by the proportion of fixed costs.

The exam angle

High fixed costs amplify both directions. Pair it with financial leverage and small revenue moves produce very large earnings moves.

Where it appears in the syllabus

• Financial Statement AnalysisCFA Level I · exam weight 11–14% · The three statements, inventories, long-lived assets, quality of earnings.
• Corporate FinanceCFA Level I · exam weight 6–9% · Governance, working capital, capital allocation, capital structure.

Related terms

• Cash conversion cycleThe time between paying for inventory and collecting cash from the customer.
• Financial leverageThe use of debt to finance assets, magnifying returns to equity in both directions.
• Working capitalCurrent assets less current liabilities — the short-term capital tied up in operations.
• Accrual accountingRecognising revenue when it is earned and expenses when they are incurred, regardless of when cash moves.
• Balance sheetA statement of what a company owns and owes at a single point in time.
• Book valueThe accounting value of equity: assets less liabilities as reported.