Lambert, S.L.; Krieger, K.; Mauck, N. Predicting Operating Income via a Generalized Operating-Leverage Model. Int. J. Financial Stud.2024, 12, 11.
Lambert, S.L.; Krieger, K.; Mauck, N. Predicting Operating Income via a Generalized Operating-Leverage Model. Int. J. Financial Stud. 2024, 12, 11.
Lambert, S.L.; Krieger, K.; Mauck, N. Predicting Operating Income via a Generalized Operating-Leverage Model. Int. J. Financial Stud.2024, 12, 11.
Lambert, S.L.; Krieger, K.; Mauck, N. Predicting Operating Income via a Generalized Operating-Leverage Model. Int. J. Financial Stud. 2024, 12, 11.
Abstract
We propose a generalized, practitioner-oriented operating leverage model for predicting operating income using Standard and Poor’s Compustat items: SALE (net sales), COGS (cost of sales), DP (total depreciation and amortization), XSGA (selling, general, and administrative expenses), and OIADP (operating income after depreciation and amortization). Prior research finds that OIADP = SALE - COGS - DP - XSGA; hence, our model includes all aggregate revenues and expenses comprising OIADP. Also, prior research finds COGS is “much less” sticky than DP and XSGA; hence, we use COGS as a proxy for total variable costs and DP and XSGA as proxies for sticky fixed costs. We introduce a new adjustment to the textbook operating leverage model so that SALE-to-COGS remains constant for the reference and forecast periods. Also, inspired by prior research, we introduce adjustments to DP and XSGA for cost stickiness. We find our generalized operating leverage model improves estimates of changes in next-quarter and next-year OIADP compared to textbook operating leverage predictions, which are special cases of our model.
Keywords
Forecasting; accounting; earnings
Subject
Business, Economics and Management, Accounting and Taxation
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
