Operating leverage (DOL)

Definition

Operating leverage (DOL) in plain English

Operating leverage measures how dramatically a company's profit swings when its sales go up or down. The key idea: businesses with lots of fixed costs (rent, machines, salaries that don't change with sales) act like a seesaw — once sales pass the point that covers those fixed bills, extra sales flow almost straight to profit, but if sales dip, profit can crater fast. The DOL (Degree of Operating Leverage) puts a number on it: a DOL of 3 means a 10% rise in sales produces a 30% jump in operating profit (EBIT). High operating leverage is thrilling on the way up and brutal on the way down.

Learn these first

• Systematic risk

Related Principles of Finance terms

• After-tax cost of debt
• Business risk
• Capital structure
• Cost of preferred equity
• Debt-to-capital ratio
• Debt-to-equity ratio
• Degree of financial leverage (DFL)
• Degree of total leverage (DTL)
• Financial leverage
• Hamada equation