How this calculator works
Operating leverage comes from fixed costs. A business with large fixed costs and small variable costs keeps most of each extra sales dollar, so a modest sales rise produces a large profit rise, and a modest sales fall cuts profit sharply. The degree of operating leverage measures that amplification: a value of 1.5 means a 10 per cent change in sales produces a 15 per cent change in EBIT, other things equal. It is highest for companies close to break-even, where EBIT is small, so a ratio that looks alarming may simply be measuring a thin profit margin rather than a riskier cost structure.
Formula
Degree of operating leverage = percentage change in EBIT / percentage change in sales. Percentage change in sales = (period two sales - period one sales) / period one sales. Percentage change in EBIT = (period two EBIT - period one EBIT) / period one EBIT. To recover period two EBIT, multiply period one EBIT by (1 + leverage × change in sales).
Worked example
Sales rise from $1,000,000 to $1,100,000, a 10 per cent increase, while EBIT rises from $200,000 to $230,000, a 15 per cent increase. The degree of operating leverage is 15 / 10 = 1.5. At that leverage, a further 10 per cent rise in sales would lift EBIT by another 15 per cent.
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Frequently asked questions
Why is operating leverage higher near break-even?
When EBIT is small, a given dollar change is a large percentage change. The leverage formula therefore spikes as profit approaches zero, even if fixed costs have not changed. Use it alongside the fixed cost share to understand the underlying risk.
Does operating leverage include interest?
No. It measures the effect of sales on operating profit before interest and tax. The amplification from debt is financial leverage, which combines with operating leverage to produce total leverage.
Can leverage be negative?
Yes, when sales and EBIT move in opposite directions, typically because EBIT is negative. The calculator allows a negative result and the interpretation inverts: a sales increase then deepens the loss.