(1)Review the financial statements for DICOM and Captiva Software.

What are the key

differences in terms of presentation and terminology?

Solutions: The presentation of financial statements for both firms DICOM and Captiva Software
are different. It has been presented like starting with fixed assets followed by current assets. The
presentation of financial statement of Dicom in UK standard . The actual format for preparing
the financial statement is followed by Captiva and it is easy to understand and follow the facts
presented in the format. The actual format should have followed by Captiva is as per at least
IFRS standards. The terminology used in the financial statement of Dicom like Tangible Assets
(It should be mentioned like what are those tangible assets like Property Plant and Equipment),
Investments (Nature of investment should be mentioned like short term or long term), Amount
falling due within one year (should be mentioned as current maturity) Trade and Others (We have
to mention the total creditors in a single numbers and then have to give the breakup of the items
in notes to accounts. Amount falling due after more than one year (should be mentioned as long
term debt etc), Minority Interest Equity need not be mentioned here.

In the similar way, there are many terminologies which need to be going under a change.

(2)What financial ratios would you use to judge the performance of the two firms? How do
they compare on these dimensions?

Solutions: As buyer side analysts, I would look for below mentioned ratios to understand the
performance of the two firms:

(i) EBITDA Margin This ratio is very useful to understand the overall income
generation of the company from the business activities. An EBITDA margin gives an
idea of prospective income after meeting all the regular expenses of the business
before giving interest, depreciation and amortization. EBITDA margin is calculated
by dividing the EBITDA levels with the total sales.
(ii) PAT Margin This ratio is calculated by dividing profit after tax with total sales. PAT
gives an impression, what is return from the sales, the company has generated from
its business operations. More the PAT amount better is the comfort to the investors.
(iii) Interest Coverage Ratio As per this ratio, we come to know that how the company is
able to service its interest for the borrow rings it has. This ratio is calculated by
dividing the EBITD with interest.
(iv) Current Ratio This ratio is calculated to understand the liquidity position of
companies. This ratio is calculated by dividing the current assets with current
liabilities. More the current ratio, better the liquidity position it has. Generally a
current ratio of more than 2 is an ideal scenario for better liquidity position.
(v) Receivable Turnover As per this ratio, we come to understand, how the collection
mechanism is followed by the company for the receivables which are supposed to be
collected from the customers. Generally the accepted receivable turnover depends
upon the respective industry the company belongs to . We calculate this ratio , by
dividing the receives with total sales by multiplying with 365.
(vi) Inventory Turnover - We can calculate this ratio by dividing inventory with cost of
good sold and multiplying the same with 365. This ratio indicates, the maximum
number of days, the company holds its stock. Acceptable inventory holdings depend
upon the business model of the company.
(vii) Creditors Turnover As per this ratio, we come to understand, how many days the
company takes to pay its creditors. This ratio is calculated by dividing creditors with
credit purchases and multiplying the same with 365. Lesser the creditors turnover,
better it is and the vendors would be happy to supply you.
(viii) Debt Ratio - This ratio is calculated by dividing the total assets with total liability. As
per this, we come to understand, what portion of assets are funded by debt. Less the
ratio, better it is. Generally when we talking about the debt, it is only the long term
debt for consideration. We never consider the short term debt under this category.
(ix) Asset Turnover Over - As per the ratio we come to know, how the company is able
utilize its assets to generate revenue. This ratio is calculated by dividing the total
turnover with total assets. More the ratio better is the utilization of assets.
(x) Return on investment - This ratio is calculated by dividing the EBITDA with total
investment made. More is the ratio, better it is. Now as per this practice, EBITDA
gives the message of how the company is able to do in a proper manner.
(xi) Return on equity As per this ratio, it is calculated by dividing the net income with
total equity. Higher return could allure more investors to invest in this company.
(3)What are the key differences in accounting policies for the two companies (under US and
UK Standards)? How would these differences affect some of the key ratios that you
considered in question 2?

Solutions: The key differences in accounting policies for both companies are the presentations
made in financial statements with different terminologies and different formats. But the content
of the financial statement are same following any accounting standards. This presentation wont
affect the key ratios, which we considered in earlier question, because we shall be having the
same amount and similar items of the financial statements.

(4)What business factors could explain any differences in performance that you find for the
two companies?

Solutions: Both companies operate in different countries. The demand for the product which
both companies are dealing with differs from one country to the other country. The qualities of
products offered by both companies and the services rendered to the customers are unique in
nature. The product gamut every company deals with has potential to cater the needs of the
customers. Apart from all these, there will exchange risk as the companies are dealing in many
currencies. The performance difference may also come because of the geographical presence and
the country specific risk attached to every country.

(5)Which company do you rate as the better investment prospect?

Solutions:

Captiva Software
Corporation DICOM Group Plc
(As per U.S.
Accounting (As per U.K. Accounting
Standard) Standard)
2004 2003 2004 2003

EBITDA Margin 10.0% 6.4% 6.2% 5.7%

PAT Margin 6.1% 4.5% 2.5% 3.4%
Interest Coverage 6821 3675 50 22
Current Ratio 1.95 1.66 0.79 0.65
Receivable Turnover 73 69 79 80
Debt Ratio 0.01 0.01 0.03 0.03
Assets Turnover 1.12 1.32 1.02 1.06
Return on investment 11.2% 10.6% 5.5% 7.8%
Return on Equity 11.2% 10.6% 5.5% 7.8%

(Note: Receivable and Inventory Turnover are not applicable, hence

did not calculate)

From the above ratio calculations, we observe that investing in Captiva Software Corporation
would be a better investment prospect because of the better fundamentals of the company.