Operating leverage

How much operating profit moves for a given move in revenue, which depends on the share of costs that are fixed.

A company whose revenue rises 10% and whose operating profit rises 20% has an operating leverage of two times. The exporter going from ₹4,800 crore to ₹5,280 crore of revenue and from ₹960 crore to ₹1,150 crore of operating profit is doing exactly that.

High operating leverage is not a virtue or a vice; it is a description of the cost structure, and it is symmetric. The same business that turns a 10% sales rise into a 20% profit rise turns a 10% sales fall into a 20% profit fall. Cinemas, airlines, hotels and cement all live here, which is why their earnings swing far more than their revenues and why valuing them on a single year's profit is a mistake.

Model the downside with the same multiplier as the upside.