Operating Leverage

OL = %Change in EBITA / %Change in Sales

PPE investments will result in fixed assets. An expansion of PPE investments will increase the per year depreciation expense together with production capacity. However, the bottom line will be hurt if the production capacity is not reached due to lack of sales. In this case, the depreciation expense become the fixed cost in production.

Analysis Framework

  1. Industry Life Cycle
  2. Sector Rotation
  3. Business Cycle