What is operating leverage? Degree of Operating Leverage

Operating leverage coefficient, in English, is Degree of Operating Leverage, referred to as DOL, also known as "operating leverage", which is used to measure the impact of a company's sales changes on profit changes. When calculating the operating leverage coefficient, the change rate of profit before interest and tax and the change rate of sales in a specific financial period are used. By dividing the two, the company's operating leverage coefficient in that financial period can be obtained. The degree of operating leverage marks the correlation between the company's profit changes and the sales changes. The higher the DOL value, it means that when the company's sales increase, its profits will also increase significantly. Similarly, if sales decrease, the company's profits will also decrease significantly. When the DOL value is low, changes in sales have less impact on profit levels. At the same time, since the company's profit involves the relationship between sales, fixed costs and variable costs, DOL can also be used to evaluate the proportion of fixed costs in the company's operating costs. In addition to evaluating the company's own cost model and operating model, the level of DOL will also have a certain impact on the company's stock price fluctuations, because investors will make investment responses by looking at the company's income report.