Risk Cluster Framework - How to analyse Companies by Operating Leverage

Sales volatility and Operating Leverage are main drivers of earnings changes. Because of the importance of earnings for analysts, investors and executives, operating leverage is the key information for companies’ assessment. Companies with rigid cost structures are more risky compared to companies with flexible cost structures. The developed framework uses changes in sales and cost structure rigidity to define risk clusters. Companies within a risk cluster show similar return-risk relations. The framework is useful for inter-industry analysis and for deriving standard strategies based on considerations of how companies may diversify their product offering to smooth revenues and to increase profitability.