Series 79 practice questionhardIndustry/Sector Analysis
What does a high operating leverage business model usually mean?
- AThe company has no debt outstanding
- BInventory can always be ignored
- CA large share of costs is fixed, so small revenue changes can create amplified profit swings✓ Correct answer
- DRevenue is regulated by the SEC
Explanation
Why C — A large share of costs is fixed, so small revenue changes can create amplified profit swings
A large share of costs is fixed, so small revenue changes can create amplified profit swings When fixed costs are high, incremental revenue drops through to profit quickly, but revenue declines also hurt margins more sharply. Understanding operating leverage is important when stress-testing cyclical industries.
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