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Finance GlossaryOperating Leverage
Operating Leverage
Definition of Operating Leverage
Operating Leverage is a measure of how much a company's operating income changes as its sales revenue changes. It is defined by the ratio between fixed cost and variable cost within the cost structure of a company. A company with high operating leverage has a higher percentage of fixed costs relative to variable costs. Companies in capital-intensive sectors such as manufacturing, telecommunications, or infrastructure are likely to have high operating leverage. High operating leverage can result in a higher increase in profits as sales rise, but can also cause a higher decrease in profits as sales fall.
Related Terms
Reverse Stock Split
A reverse stock split is a corporate action that involves a company reducing the number of outstanding shares it has, while the stock price increases proportionately. For instance, if there is a 1:5 reverse split, five shares are combined into one. A reverse stock split does not change the value of a company. However, it is often used to meet the requirements of listing on an exchange or improve the perception in the market.
Momentum Investing
Momentum Investing is an investment approach that focuses on buying securities that have shown strong recent price performance and selling those with weak performance. The strategy is based on the idea that assets trending in one direction often continue moving that way for some time due to market behavior and investor psychology.
Holding Company
A holding company is a parent organization that holds a controlling interest in one or more subsidiary companies. The goal of a holding company is not to create products or services but to hold financial securities, typically in the form of equity, in other companies that create products or services. For example, Raise Financial Services is a holding company while Dhan is its subsidiary.
Net Present Value (NPV)
Net Present Value (NPV) is a technique that assesses whether an investment is worthwhile by discounting future cash flows to today’s value and weighing them against the upfront cost. If the result is positive, the project is likely to add value; a negative result signals potential loss.
Non-Cyclical Stocks
Non-Cyclical Stocks are shares of companies whose performance is relatively stable regardless of economic ups and downs. These businesses provide essential goods or services, so demand remains steady even during slow economic periods, making such stocks less volatile than cyclical stocks.
Book Running Lead Manager
A book running lead manager is the head or lead of the underwriting process when new shares or securities are issued for their client, most commonly during an IPO.
For context, there was a time when physical ownership certificates were issued. If someone wanted to sell their shares, they’d have to present the ownership certificate and get it transferred to the buyer.
Also known as the book runner, the book running lead manager handles these crucial elements of the underwriting process:
For context, there was a time when physical ownership certificates were issued. If someone wanted to sell their shares, they’d have to present the ownership certificate and get it transferred to the buyer.
Also known as the book runner, the book running lead manager handles these crucial elements of the underwriting process:
- Perform due diligence
- Determine the final offering price
- Record & track interested buyers
- Confirm orders
- Guarantee purchase
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