Corporate FinanceFinancial Glossary
Operating Leverage
Definition
The degree to which a company uses fixed costs in its cost structure. A company with high operating leverage has a large proportion of fixed costs (rent, salaries, equipment) relative to variable costs. This means a small change in revenue leads to a disproportionately large change in operating profit.
Why It Matters
High operating leverage amplifies both gains and losses. Software companies like TCS and Infosys have high operating leverage — once their fixed costs are covered, most incremental revenue flows directly to profit. Conversely, in a revenue downturn, profits can collapse rapidly. Understanding operating leverage helps you assess how sensitive a company's earnings are to revenue changes.