Find the fixed-cost share first. The higher it is, the more the profit line will swing for every move in sales. Cement, airlines, hotels, capital goods sit high. Asset-light distributors sit low.
02
Leverage works both ways. The same structure that turns a 10% sales drop into a 40% profit fall turns a 10% rise into a 40% jump. High leverage is not bad. It is a bet on the direction of the cycle.
03
A high-leverage business at the top of its cycle looks like a compounder. Read the cost structure before you decide whether the last three good quarters were skill or just the wind at its back.
Revenue is the story management tells. Operating leverage is the amplifier in the room. Read the cost base, and the earnings swing stops being a surprise.