Degree of operating leverage is a financial ratio that helps managers understand how sales affect operating income. The higher the degree of operating leverage, the more sensitive operating income is to sales levels. To calculate the degree of operating leverage, you'll need to know the company's current and previous sales and earnings figures.
Calculating Degree of Operating Leverage
To calculate a business's degree of operating leverage, divide the percentage change in earnings before interest and taxes, or EBIT, by the percentage change in sales. For example, say that a business has current EBIT of $10 million, current sales of $40 million, prior year EBIT of $3 million and prior year sales of $35 million. The percentage change in sales is 28.6 percent (10/35) and the percentage change in EBIT is 70 percent (7/10). The degree of operating leverage is 28.6 percent divided by 70 percent, or 40.9 percent.
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