Operating leverage
DCFThe degree to which fixed costs amplify the effect of a revenue change on profit.
A business with high fixed costs sees profit move far more than revenue in either direction, because the cost base does not follow sales. A 10% revenue rise can produce a 30% profit rise, and a 10% fall can be equally brutal.
The mechanism is arithmetic. If costs do not move, every additional euro of revenue drops to profit at the contribution margin rather than the average margin, so margins expand with scale and contract with decline.
It is the reason cyclical businesses swing so violently, why software companies become extremely profitable once they pass breakeven, and why a manufacturer's margin at the bottom of a cycle says almost nothing about its quality.
In a forecast it is what makes a driver based build worth the effort. A model with every cost as a percentage of revenue has assumed operating leverage away entirely, and therefore cannot show the single most important thing about how the business scales.
Worked example
Revenue 1,000, fixed costs 500, variable costs 300, so EBIT is 200 at a 20% margin.
Revenue rises 10% to 1,100. Variable costs scale to 330, fixed costs stay at 500, so EBIT is 270. Revenue rose 10% and profit rose 35%, and margin went from 20% to 24.5%, purely from the fixed base.