What does the term `high degree of operating leverage` imply, and what are some implications of having a high degree of operating leverage?

High Degree of Operating Leverage

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January 24 , 2009

Financial Leverage

The commonly known leverage is Financial Leverage that basically means the degree to which a company or an investor has borrowed money from a lender . For the amount that is borrowed , the company has to pay its cost periodically , generally known as interest . If such a cost is not paid on time , a penalty can be imposed or in case the business is unable to make

br regular payments on their debt , they may be blacklisted and unable to find future credit (Besley Brigham , 2005 . The positive from taking financial leverage is the availability of huge pool of funds to undertake a growth movement which can lead to an increase in shareholders ' return on investment . A company whose major investment comes from loan and credit , usually retailers generally have a high degree of financial leverage (Investor Words , 2009

Operating Leverage

On the other hand operating leverage refers to the extent a company uses its fixed costs to produce its goods and services . Fixed costs used in routine business include expenses incurred on advertising , salaries rent (in some cases ) and depreciation etc . except for interest payable on debt which we consider as a part of financial leverage (The Free Dictionary , 2009 . These fixed costs give an opportunity to the company to expand its operations or atleast keep them running period to period

If a company has huge share...