Another, perhaps more common, situation is when a business has a high degree of operating leverage. This does not refer to debt per se, but rather, the level of fixed expense relative to total sales. If a company has high operating leverage, and sales decline, it can have a dramatically disproportionate effect on the net income of the company. This would result in a sudden, and equally dramatic, decline in the interest coverage ratio, which should send up red flags for any conservative investor.