Companies with relatively low incremental cost of serving additional customers typically have high 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗟𝗲𝘃𝗲𝗿𝗮𝗴𝗲.
Such companies have a higher proportion of their overall costs as fixed (and have lower variable costs).
𝗡𝗲𝘁𝗳𝗹𝗶𝘅 incurs large fixed costs such as content, licensing and tech infrastructure, however the cost of serving additional subscribers is very low.
As the platform adds more and more subscribers, the incremental revenue from them largely flows to the bottom line leading to margin expansion.
But, having high fixed costs is a double edged sword.
A decline in customers leads to margin erosion — this is called 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗗𝗲-𝗹𝗲𝘃𝗲𝗿𝗮𝗴𝗲.
𝗣𝗩𝗥 𝗜𝗡𝗢𝗫 has high fixed costs – rent, manpower, maintenance, utilities.
PVR has been experiencing significant Operating Deleverage due to declining footfalls (They still got to pay those high fixed costs even with low # of people returning to theatres). The low stock price is evident of the Operating Deleverage at play.
OTT releases and theatrical window compression isn’t helping box office sales. Hope theatrical-only release of Sitaare Zameen Par turns around its fortune — may be that would be hoping for too much.
Airlines, Utilities, Telecom, Hotels, Resorts, Asset Management and Technology companies have high operating leverage / de-leverage.
But companies do not break up costs as fixed and variable. Then, how do you identify fixed and variable costs?
Typically, cost of goods sold (COGS) or cost of services are variable and operating expenses SG&A in the P&L are a good proxy for fixed costs.
———————————————————————-
Explanation of operating leverage in this short video!
It is my honest endeavor to post quality and well researched education content on LinkedIn and on my YouTube channel www.youtube.com/@investandrise/
#investandrise #equityresearch #valuation #operatingleverage #financialmodelling #financialstatementanalysis #emergingmarkets #SitaareZameenPar
Which industries / companies have low operating leverage?
Answer in the comments.
Please reach out me at gautamrastogi.investandrise@gmail.com for any questions.
Invest (in yourself) and Rise!
www.youtube.com/@investandrise/
One response
Some genuinely wonderful work on behalf of the owner of this website , perfectly outstanding subject material.