Which type of company is preferable when considering operational leverage after a revenue increase?

A company with higher operating leverage becomes increasingly preferable after a revenue increase because operating leverage refers to the extent to which a company can increase its profits by increasing sales. Firms with higher operating leverage have a larger proportion of fixed costs relative to variable costs. When sales rise, the revenue generated contributes significantly to covering fixed costs, leading to an amplified increase in profit.

This effect occurs because once fixed costs are covered, additional revenue flows directly to the bottom line, resulting in a higher percentage increase in operating income compared to the percentage increase in revenue.

Therefore, in a scenario where revenue is on the rise, a company with higher operating leverage would maximize profit potential more effectively than other types of companies. This characteristic is advantageous, especially for companies poised to experience significant growth, as they can leverage their cost structure to capitalize on increased sales.