Prior to beginning work on this discussion, please read the Investing Newsletter of Forbes Operating Leverage (Links to an external site.). The Finnish company Rovio Entertainment Corporation (Links to an external site.) that produces and sells the game Angry Birds, following years of falling earnings, job cuts and divestments announced that its revenue increased 34% in 2016 to 190 million euros ($201 million dollars). According to Rosendahl, the operating result improved to a profit of 17.5 million euros from a loss of 21 million in 2015, increasing earnings by 83% (Rosendahl, 2017). In 2015, Rovio Entertainment Corporation announced that its revenues for 2014 decreased nine percent compared to those of 2013; even worse, its earnings had decreased by 73% (Read the article, Investors Take Flight After Angry Birds Maker Warns on Profit (Links to an external site.)).
After reading Forbes’ Investing Newsletter, in an initial post of at least 200 words, explain why relatively small changes in companies’ revenues can result in relatively large changes in their earnings or losses. In other words, if a company’s sales increase 12%, why do its earnings not also increase 12%?
Guided Response: Review several of your peers’ posts. In a post of at least 100 words, respond to at least two of your peers’ posts in a substantive manner. Provide information that they may have missed or may not have considered in regard to operating leverage. A company’s earnings can rise faster, as a percentage, than its revenue due to operating leverage, and operating leverage is due entirely to the fixed costs. Do you agree with your peers’ findings? Why or why not?
