Logo image
Back
Predicting Operating Income via a Generalized Operating-Leverage Model
Journal article   Open access   Peer reviewed

Predicting Operating Income via a Generalized Operating-Leverage Model

Sherwood Lane Lambert, Kevin Krieger and Nathan Mauck
International journal of financial studies, Vol.12(1), p.11
01/23/2024
DOI: https://doi.org/10.3390/ijfs12010011
Web of Science ID: WOS:001192769600001

Metrics

110 Record Views

Abstract

We propose a generalized, practitioner-oriented operating-leverage model for predicting operating income using net sales, cost of sales, depreciation, and SG&A. Prior research links operating income directly to these items; hence, our model includes all aggregate revenues and expenses that comprise operating income. Prior research finds that the cost of sales is “much less” sticky than depreciation and SG hence, we use the cost of sales as a proxy for the total variable costs and depreciation and SG&A as proxies for the sticky fixed costs. We introduce a new adjustment to the textbook operating-leverage model so that the ratio of sales to the cost of sales remains constant for the reference and forecast periods. Inspired by prior research, we adjust depreciation and SG&A for cost stickiness. We find that using our generalized operating-leverage model improves the forecast accuracy of next-quarter and next-year operating income predictions compared to predictions made using textbook operating leverage, which is a special case of our model.
url
Predicting Operating Income via a Generalized Operating-Leverage ModelView
Published (Version of record)link to articleCC BY V4.0,  Open

Related links

Details

Logo image