Abstract

This article investigates the effects of degree of operating leverage and contribution margin on profitability and risk of Nigeria’s emerging companies. Emerging companies were described in this study as small and medium-sized enterprises that are high-potential and high-growth in character listed in the Nigerian Stock Exchange’s Alternative Investment Market. Cross-sectional and time series data were collected from Nigerian Stock Exchange for the top ten emerging companies listed in the market. Additional restricted-access data about internal management accounting decisions were retrieved directly from these firms. Data were sought to estimate values for operating profit, operating risk, degree of operating leverage, and contribution margin. Since data were collected for ten years in each case, a ten-by-ten panel study involving two models was designed. The probability of both f-test and t-test was 0.05. First, the study shows that degree of operating leverage (DOL) contributes less to profit before interest and tax (PBIT) of emerging companies than contribution margin (CM), yet DOL contributes more to their operating risk profile than CM does. Second, only CM was found to have caused significantly positive changes in operating risk. It was, therefore, concluded that emerging companies face challenges in recovering fixed costs or take unusually longer period to breakeven.

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