New Mauboussin Paper: Operating Leverage

“There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose.”

―Michael J. Mauboussin, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

Operating Leverage: A Framework for Anticipating Changes in Earnings

Credit Suisse’s Global Financial Strategies team has published a new report, “Operating Leverage.”

  • MM_OpLevAnalysts are commonly too optimistic about earnings growth and often miss estimates by a wide margin.
  • This report outlines a systematic way to assess earnings revisions with a specific emphasis on operating leverage.
  • We cover the drivers of sales growth and then discuss the value factors, which determine the impact of sales changes on operating profit.
  • To measure operating leverage, we examine the relationship between the change in sales and the change in operating profit for the top 1,000 companies from 1950 through 2014. We also examine eight sectors.
  • Operating leverage and financial leverage together determine earnings volatility.
  •  Sales growth, profit growth, and value creation do not always go together.

Want More?

See here for a collection of links to other Mauboussin papers.