If a company has high operating leverage, what would be the likely effect on its risk and return?

High operating leverage means that a company has a high proportion of fixed costs relative to its variable costs. Here's how it would likely affect its risk and return:

1. Risk: High operating leverage increases a company's risk. This is because fixed costs must be paid regardless of the company's level of output. If sales are low, the company still has to cover these costs, which can lead to financial distress or even bankruptcy. Therefore, the risk of not being able to cover operating costs increases with high operating leverage.

2. Return: On the other hand, high operating leverage can also lead to high returns. If a company's sales are high, the fixed costs are spread over a larger number of units, reducing the cost per unit. This can lead to higher profit margins and thus higher returns.

In summary, a company with high operating leverage can experience high risk and high return. The actual outcome depends on the company's sales volume.