Operating Leverage
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Operating Leverage
The recent years have brought to attention the volatility of the financial market and the difficulty for many industries to forecast and predict future growth. One way for a company to improve its financial position is through the use of operating leverage. Understanding operating leverage is important because it is a two-edged sword. When sales are increasing, a cost structure that favors fixed costs results in a greater percentage increase in profits, however, when sales slump, a high fixed-cost structure eats up profits. Since many decisions on how to finance a business are based, in part, on how much in fixed assets you invest in, you will want to evaluate the role of operating leverage. A company should avoid over-borrowing to pay for equipment and fixed assets that may result in a cost structure that penalizes the company in a business or economic downturn. This paper will review the use of operating leverage and its effects on certain industries.
Recently, in the hotel industry, the investment climate has substantially changed. The industry has experienced a dramatic increase in hotel supply, along with indications that revenue growth is eroding and the cost to acquire most hotels is close to exceeding replacement cost. These changes in hotel investments raise many questions and concerns about where the investment return performance of the industry is headed...