Interpreting common-size income statements Ericsson, a Swedish electronics and telecommunications firm, has seen increasing sales in recent years. At the same time, its profit margin has declined. Exhibit 4.9 presents common-size income statements for Ericsson for three recent years, based on Ericsson€™s financial reports for fiscal 2007. Ericsson applies IFRS and reports in millions of Swedish kroner (SEK). Discuss the likely reasons for the decreasing profit margin for Ericsson over the three-yearperiod.

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Ericsson Common-Size Income Statements EXHIBIT 4.9 (in SEK millions) (Problem 31) 2007 2006 Fiscal year ending December 31 2005 Net Sales ... SEK 187,780 SEK 179,821 SEK 153,222 100.0% 100.0% 100.0% Cost of Sales . (114,059) (104,875) (82,764) -54.0 -60.7 -58.3 Gross Margin SEK 73,721 SEK 74,946 SEK 70,458 46.0% 39.3% 41.7% Research and Development Expenses .. Selling and Administrative. Operating Expenses Other Operating Income and Expenses Share in Earnings in Assaciated Companies .. (27,533) -15.3 (21,422) -11.9 SEK (48,955) -27.2% (28,842) -15.4 (24,059) -15.7 (16,800) -11.o SEK (40,859) -26.7% (23,199) SEK (52,041) -12.4 -27.7% 1,734 0.9 3,903 2.2 1,090 0.7 5,934 2,395 7,232 3.9 3.2 1.6 SEK 30,646 SEK 35,828 SEK 33,084 Operating Income. 16.3% 19.9% 21.6% Financial Income 1,954 2,653 1.7 1,778 0.9 1.1 Financial Expenses Income After Financial Items (1,695) (1,789) (2,402) SEK 33,335 -1.6 -0.9 -1.0 SEK 30,729 SEK 35,993 20.0% 21.8% 16,4% Taxes (8,594) SEK 22,135 -4.6 (9.557) (8,875) SEK 24,460 -5.8 -5.3 Net Income SEK 26,436 11.8% 14.7% 16,0% Of which: Stockholders of the Parent Company SEK 26,251 SEK 24,315 SEK 21,386 11.4% 14.6% 15.9% SEK SEK Minority Interest SEK 299 0.2% 185 0.1% 145 0.1%