Archimedes once said, “Give me a lever and a place to stand, and I can move the world”.
Thousands of years later, investors continue to talk about the power of leverage.
However, when investors discuss leverage, they usually refer to the amount of debt they use. But there is an even more powerful type of leverage that many investors ignore – operating leverage.
Debt, or financial leverage, uses other people’s money to invest more than what you would be able to do without it, magnifying returns (or, if things go the other way, losses).
But operating leverage is different. It happens when a company’s cost structure is largely fixed, which are costs that don’t change much as activity changes, meaning that costs don’t grow as fast as revenue, leading to increased profit margins over time. Of course, like in the case of financial leverage, if revenue goes backwards, profitability will fall at a faster rate than revenue.
Why this ASX stock is building profit, not buildings
A great example of operating leverage in action is ASX stock and Australian alternative investment manager Qualitas (ASX:QAL).
Although Qualitas’ business is largely focused on the Australian real estate market, it does not own properties directly. Instead, it manages a series of investment funds which invest in assets across different real estate asset classes such as real estate private equity, developments, and private credit, amongst others.
This means it has more in common with a fund manager, a textbook example of a business model with lots of operating leverage, than your average real estate investment trust (REIT).
Because of how Qualitas generates revenue, there is little incremental cost incurred as it grows. This means that while Qualitas continues to generate strong revenue growth, its earnings growth may persistently outpace it.
While it can launch new investment products or take in new investment capital in its funds, it doesn’t need to pay for additional inventory, land, or even necessarily increase the number of people it needs to employ to function as it grows.
This can be observed in Qualitas’ historical financial performance.
In 2018, Qualitas generated $11.5 million in net earnings on approximately $47.4 million of revenue (or a 24.1% net margin). By the end of the 2025 calendar year, on a trailing twelve-month basis, Qualitas was generating $37.9 million in net earnings on $123.2 million of revenue (or a 30.8% net margin). This means that in around seven years, revenue had increased by 160%, and earnings had increased 229%.
