As the title says, trying to wrap my head around how different levels of operating leverage affect the three financial statements. From my understanding, high DOL would result in a larger increase in net income once fixed assets are covered, not entirely sure about the CFS, and the BS would have larger D&A expenses. I would assume the converse is true for low DOL. Can anyone chime in and explain if this is correct / if not, how to think about this? Thank you!
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You're thinking about it the right way, but I've really only ever heard of the effect of operating leverage on the IS, which of course flows into the other statements. But the focus is on the IS and the volatility of earnings. Of course an increase in revenue with no additional variable costs (i.e. 100% operating leverage) will, with no change in working capital policy, lead to a higher cash flow.
You mention D&A on the BS, but that will also show up on the CFS and the IS. Your fixed costs don't always have to be related to capital equipment that is depreciated. It could be your labor costs if you are not easily able to fire people, like say for regulatory reasons, or your raw materials if you have to purchase a certain quantity just to get access.
Google the "Base Rate Book" by Michael Mauboussin, it has a chapter on operating leverage.
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