BAR Leverage · Updated November 2026
Operating Leverage or Financial Leverage: Which Fixed Cost Creates the Risk?
Both forms of leverage amplify changes, but they come from different fixed costs.
Operating leverage
Fixed operating costs such as rent, depreciation, and salaried production costs make operating profit more sensitive to changes in sales.
Financial leverage
Fixed financing costs, especially debt interest, make returns to equity more sensitive to operating performance.
Combined leverage
A business with both high operating leverage and high financial leverage can experience significant earnings volatility.
Risk interpretation
Leverage can magnify both upside and downside, so higher leverage is not automatically better.
The takeaway
Operating leverage comes from running the business. Financial leverage comes from how the business is financed.
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FAQ
Is debt interest an operating leverage cost?
No.
Can fixed production costs increase operating leverage?
Yes.
Can leverage increase both upside and downside?
Yes.