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Operating Leverage
What does it mean?
A measurement of the degree to which a firm or project relies on fixed rather than variable costs.
In Other Words...
The higher the degree of operating leverage, the greater the potential danger from forecasting risk. That is, if a relatively small error is made in forecasting sales, it can be magnified into large errors in cash flow projections. If the majority of costs for a company or project are fixed, then the costs will remain high while sales are dropping.
Related Links
Introduction to Fundamental Analysis - Here's an easy-to-understand tutorial on the techniques of analyzing a company's financial statements, including the annual and quarterly reports, the auditor's report, and much more.
Related Terms
Cash Flow | Fixed Cost | Leverage | Variable Cost
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