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Why understanding operational gearing is key to successful investing

Understanding the relationship between a company's revenues and its costs can keep you away from risky companies and help you spot potential winners

Good investing is just as much about avoiding losers as picking winners. Thinking about business risk is therefore very important. Ultimately, the long-term fortunes of investors will be tied to the quality of the business they are invested in and the amount of business risk it is exposed to. One of the biggest risks of a business is related to how its costs and revenues are related. A failure to understand this can lead to catastrophic results, but grasping its importance can also allow you to pick winning shares.

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