How to gain the most out of your Operating Leverage
One major reason for stock markets performing strongly during the pandemic has been the belief that companies will layoff employees and replace them with technology. This is expected to make companies more efficient and thereby improve profit margins. Coupled with the vaccination program and government stimulus, investors expect profits to boom when the economy recovers.
The accounting term used to describe this action is increasing operating leverage. Where revenues are expected to grow, such as in a recovering economy, operating leverage will enable greater profits from a similar revenue base.
However, operating leverage is a double edged sword.
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