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Case Financial Performance - PT Timah

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ASSESSMENT OF BUSINESS PERFORMANCE PT TIMAH TBK AND SUBSIDIARIES 1 EDUARDUS TANDELILIN Following the declaration of Independence in Indonesia in 1945, the tin mining industry gradually came under Indonesian control as Dutch mining concessions ran out. This transfer of control culminated in 1960 with the passing of Law No. 19 which established a State Tin Enterprise Coordinating Board and State Enterprises for the three tin producing units on the islands of Bangka, Belitung and Singkep. In 1968, the four entities were brought under one single controlling state enterprise by Government Regulation number 21, coordinating tin operations under the State company PN Tambang Timah which was given control of the known tin deposits in Indonesia. The status of that enterprise was changed in 1976 to PT Tambang Timah (Persero), a limited liability corporation, with the Government of Indonesia as the sole shareholder. The company's main operations were historically centered around the islands of Bangka, Belitung and Singkep. The company operates a large fleet of bucket line dredges and controls other mining activities, primarily using hydraulic mining methods. Beginning in 1991, a major restructuring program commenced which included the closure of mining operations on Singkep and the relocation of the 1 This case was written by Dr. Eduardus Tandelilin of Master of Management Program Gadjah Mada University, Yogyakarta, Indonesia. The author wishes to acknowledge research funding from Master of Management Program, Gadjah Mada University. This case is intended as a basis for class discussion rather than to illustrate either effective or ineffective handling a financial matter at the firm. Any interpretation of the data as well as any errors or omission is the responsibility of the author. Research assistance was provided by I Wayan Nuka Lantara and Lukas Purwoto. Copyright © 2001. Allright reserved. This publication is protected by Copyright and permission should be obtained from MM GMU. 1
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Page 1: Case Financial Performance - PT Timah

ASSESSMENT OF BUSINESS PERFORMANCE

PT TIMAH TBK AND SUBSIDIARIES1

EDUARDUS TANDELILIN

Following the declaration of Independence in Indonesia in 1945, the tin mining industry gradually came under Indonesian control as Dutch mining concessions ran out. This transfer of control culminated in 1960 with the passing of Law No. 19 which established a State Tin Enterprise Coordinating Board and State Enterprises for the three tin producing units on the islands of Bangka, Belitung and Singkep. In 1968, the four entities were brought under one single controlling state enterprise by Government Regulation number 21, coordinating tin operations under the State company PN Tambang Timah which was given control of the known tin deposits in Indonesia.

The status of that enterprise was changed in 1976 to PT Tambang Timah (Persero), a limited liability corporation, with the Government of Indonesia as the sole shareholder. The company's main operations were historically centered around the islands of Bangka, Belitung and Singkep. The company operates a large fleet of bucket line dredges and controls other mining activities, primarily using hydraulic mining methods.

Beginning in 1991, a major restructuring program commenced which included the closure of mining operations on Singkep and the relocation of the corporate head office to Bangka. The restructuring also included a program of modernization and the reconstruction of production facilities and a concentration on core business activities. The conclusion of the restructuring program of Timah was listed on the Jakarta, Surabaya, and London Stock Exchanges on 19 October 1995. The name PT Tambang Timah Tbk was changed to PT Timah Tbk on July 29, 1998. The government of Indonesia owned 65 percent of the company’s shares; domestic and international investors owned the remaining 35 percent.

BACKGROUNDPT Timah Tbk was the only state enterprise active in tin mining. Timah's

competitive edge was a result of the integration of each step in the process of producing and marketing tin. The company was a cost leader. Control over substantial reserves, ownership of the largest dredge fleet in the world and the use of computer systems and satellite communications helped to minimize Timah mining costs. The use of production systems ensured Timah’s smelting operations

1 This case was written by Dr. Eduardus Tandelilin of Master of Management Program Gadjah Mada University, Yogyakarta, Indonesia. The author wishes to acknowledge research funding from Master of Management Program, Gadjah Mada University. This case is intended as a basis for class discussion rather than to illustrate either effective or ineffective handling a financial matter at the firm. Any interpretation of the data as well as any errors or omission is the responsibility of the author. Research assistance was provided by I Wayan Nuka Lantara and Lukas Purwoto.

Copyright © 2001. Allright reserved. This publication is protected by Copyright and permission should be obtained from MM GMU.

1

Page 2: Case Financial Performance - PT Timah

were highly efficient. The results claimed by management were that Timah customers received the highest-quality tin available worldwide.

Geographically and geologically, Indonesia was a wealthy country. Across the inland and offshore tin reserves controlled by Timah, the mineral deposits were some of the best in the world. The company held tin exploration and mining rights until 2025 of more than 10,000 square kilometers spread across several islands and offshore areas in the Java Sea. Timah had secured rights for gold exploration in North Sumatra, Kalimantan and Java. These rights extended over 27,000 square kilometers. Even after a long history of tin mining, a large portion of Timah's mining rights were as yet unexplored and untapped. The future appeared to hold vast potential for further mining.

At Mentok, in the northwest corner of Bangka, Timah established the largest tin smelting operation in the world. Completed in 1967, the plant underwent further increases in capacity with the addition of a seventh furnace, which raised capacity to 50,000 tons in 1997. Adjacent to the smelting operations was the largest of five washing plants operated by the company. The central washery received tin concentrate from both offshore and onshore mining operations. Using a number of different processes the tin concentrate was upgraded to approximately 74% tin content. A small amount of heavy mineral byproducts were generated by these operations and sold. Smelting at Mentok produced crude molten tin and generated recyclable by-products known as dust and hardhead. Crude tin was further refined in a smelting kettle. Waste from refining, known as tin dross, was also recycled.

Since 1995 until the present, Timah has been achieving ISO-9001 and ISO-14001 in several production units. This effort would be continued for other production units. Management considered that such certification was a must to strengthen their global position as a world-class company.

SUBSIDIARIES OF TIMAHAs a Holding Company, Timah formed a center for the formulation and

control of corporate strategy, and ensured that synergy existed between the operations of the various subsidiary companies in the process of creating and adding value. Timah determined the overall corporate structure of the Group, overall marketing strategies, budgets and allocation of funds. It managed corporate finances and the financial affairs of its subsidiaries, it set the Group's values and norms, and it determined the course of corporate development of its subsidiaries through alliances and/or acquisition.

PT TAMBANG TIMAH

Tambang Timah is established in June 1998. It is the largest World Company in area of integrated tin mining. The scope of the business is in the mining of tin and other minerals, extractive of industry, trade, and service. The company claimed that the production cost was still categorized in lower cost. In 1999, Tambang Timah established two units of large mining for project try-out to explore the deep alluvial deposit.

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PT TIMAH INDUSTRI

Timah Industri was established in June 1998. It conducts trade, re-engineering, engineering of industry, and service. At this time, the customers were separated into two markets: a tin market and a non-tin market. The tin market was the largest. Management was intended to expand the non-tin market incrementally in the future. One of the strategic chances was the development of a dockyard industry.

Timah Industri achieved certification of ISO 14001 in 1998 and ISO 9001 in 1999. By achieving of these quality standards, the company became more competitive in the free market.

PT TIMAH EKSPLOMIN

Timah Eksplomin was also founded in June 1998. The business provides services in investigation of mining, mining, analysis of laboratory, conducting a feasibility study, and investigation of technical geological and geohydrology.

Exploration of the areas of Banka and Belitung was conducted. The other effort was finding the deep alluvial deposit. Moreover, core competence in the exploration of the sea also opened a new market to Timah Explomin.

PT TIMAH INVESTASI MINERAL

Timah Investasi Mineral was established in 1997. This company was intended to conduct mining, investment activities, and services of recommendation and consultation in the mining area. For these purposes, the company got licenses and mining authority in several provinces. The director stated that the company began operations in September 1996. It had not yet resulted in operational revenue; however, the company was doing some exploration of gold, diamond, and coal mining possibilities.

FINANCIAL PERFORMANCETable 1 shows the summary of financial statement of Timah from 1997 to

1999. Management confessed that 1999 was a year full of challenges. Net profit increased 191% to Rp518.8 billion in 1998, and then experienced “windfall profit” in 1999. One factor to explain this is that the financial performance in 1998 was not real, but maybe just a result of the decline in rupiah value. Meanwhile in 1999, the increase in rupiah value appeared to negatively affect Timah’s performance. However, management commented that the bad performance in 1999 had been caused by external factors such as economic conditions.2

The financial performance of the four subsidiaries of Timah also failed to show satisfactory results. Highlights of the four subsidiaries’ financial conditions in 1999 are shown in table 2. Although three subsidiaries, Tambang Timah, Timah Eksplomin, and Timah Industri, showed an increasing trend in sales, they did not exhibit increases in net income. This was caused by the increase in the subsidiaries’ costs. For example, Timah Eksplomin had experienced an increase from Rp 33.9 in 1998 to Rp 63,605 in 1999. However, the net income decreased from Rp 1, 943 million in 1998 to Rp 0,807 million in 1999.

2 From annually report, 1999. 3

Page 4: Case Financial Performance - PT Timah

Timah Investasi Mineral even experienced a decline in its financial performance. The company did not make a sale in 1998 and 1999 but still suffered large operational costs. This condition caused the company to lose Rp 16,809 million in 1998 and Rp 16,028 million in 1999.

The results of the financial performance of Timah and its subsidiaries in following two years motivated management to evaluate the company’s achievement. Evaluation was intended to analyze Timah’s performance and the contribution of the subsidiaries to that overall performance. Besides that, this analysis allowed management to identify an alternative solution that would improve Timah’s performance as a corporation and also improve the subsidiaries’ performance.

Unfortunately, there are so many tools for doing performance assessment. It is important to analyze trends in ratios as well as their absolute levels, for trends give clues as to whether the financial situation is likely to improve or deteriorate. In common size analysis, all income statement items are divided by sales, and all balance sheet items are divided by total assets. In the percentage change analysis, growth rates are calculated for all income statement items and balance sheet accounts. The financial ratios are also interrelated as a system. The Du Pont method is one of the first to segregate into their components and focus on the linkages to return on equity as the key result. It represents a “model” of its business as in figure 1.

Performance assessment via financial statement analysis is based on past data. Any insight data gained will be relative, because business and operating conditions vary so much form company to company and industry to industry. Table 3 shows several ratios of similar companies listed on the Jakarta Stock Exchange in the mining industry. The Government of Indonesia also has determined an indicator to assess the health of state owned company (SOC). The main indicator is shown in appendix 1 and 2. Ratios are not absolute criteria: they serve best when used in selected combinations to point out changes in financial conditions or operating performance over several periods and as compared to similar businesses, industry norms, or other potential standard comparisons.

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Table 1. Summary of Financial Statement for PT Timah TbkBALANCE SHEETS (million rupiah)

1997 1998 1999Current Assets: 584,638 970,754 838,432

Cash on hand and in banks 24,957 255,704 216,845Time deposits 37,844 17,854 25,483Trade receivables 96,215 96,310 73,445Inventories 149,426 406,144 357,933

Investments 55,042 130,802 121,580Fixed Assets-Net 369,161 444,101 572,025Other Assets 141,317 151,327 204,460Total Assets 1,150,15

81,696,98

41,736,49

7

Current Liabilities: 326,413 415,567 326,842Bank borrowings 167,562 8,483 4,709Trade payable 31,038 82,544 59,051Taxes payable 22,895 151,051 97,394

Long-term Liabilities 11,118 13,993 17,465Minority Interests in Subsidiaries

2,632 2,384 2,007

Total Liabilities 340,163 431,944 346,314Paid-up capital 251,651 251,651 251,651Additional Paid-up capital 120,792 120,792 120,792Retained earnings 437,552 892,597 1,017,740Total Shareholders’ Equity 809,995 1,265,04

01,390,18

3

INCOME STATEMENTS

Net Sales 691,614 2,034,561

1,694,839

Cost of Goods Sold 396,395 672,975 944,244Gross Profit 295,219 1,361,586 750,595Operating Expenses 98,386 256,748 240,684Operating Profit 196,833 1,104,838 509,911Other Income (Expenses) 59,672 (364,532) (25,412)Profit before Taxes 256,505 740,306 484,499Profit after Taxes 177,813 518,828 318,039

Per Share Data (Rp)Earnings per Share 353 1,031 632Equity per Share 1,609 2,513 2,762Dividend per Share 141 409 247Closing Price 5,900 5,375 4,875Sources: Indonesian Capital Market Directory 2000

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TABLE 2. SUMMARY OF FINANCIAL STATEMENTS FOR SUBSIDIARIES, DECEMBER 31, 1999

(THOUSAND RUPIAH)BALANCE SHEETS

PT TAMBANG TIMAH

PT TIMAH EKSPLOMIN

PT TIMAH INDUSTRI

PT TIMAH INVESTASI MINERAL

Current Assets: 1,201,007,545

13,996,369 487,996,828

829,748

Cash on hand and in banks 7,465,132 106,456 341,564 544,098

Trade receivables 61,194,556 4,574,022 70,787,354 -

Inventories 252,329,403

- 105,341,133

-

Investments - - 39,451,982 71,000

Fixed Assets-Net 337,642,254

17,390,511 226,636,922

2,218,767

Other Assets 93,749,116 - - 25,271,133

Total Assets 1,632,398,915

31,386,880

754,085,732

28,390,648

Current Liabilities: 618,838,467

24,171,379 536,238,546

479,508

Trade payable 21,948,491 1,741,892 30,047,038 449,245

Taxes payable 91,504,236 835,548 4,712,471 28,169

Long-term Liabilities 21,070,405 242,023 1,122,864 13,419,831

Minority Interests in Subsidiaries - - - 7,739

Total Liabilities 639,908,872

24,413,402

537,361,410

13,907,078

Paid-up capital 500,000,000

5,000,000 200,000,000

43,000,000

Retained earnings (accumulated loss)

492,490,043 1,973,478 16,724,322

(28,516,431)

Total Equity 992,490,043

6,973,478 216,724,322

14,483,569

INCOME STATEMENTS

Net Sales 1,664,589,743

63,605,571 320,800,867

0

Cost of Goods Sold 920,729,043

55,863,182 310,043,396

0

Gross Profit 743,860,709

7,742,389 10,757,471 0

Operating Expenses 155,835,755

7,103,573 7,227,529 1,591,128

Unsuccessful Exploration - - - 14,508,102

Operating Profit (loss) 588,024,954

638,816 3,529,942 (16,099,230)

Other Income (Expenses) (68,746,776)

998,584 2,559,752 68,636

Profit (loss) before Taxes 519,278,178

1,637,400 6,089,694 (16,030,594)

Profit (loss) after Taxes 353,946,209

807,156 921,781 (16,030,594)

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Additional information:

Capital stock in shares 500,000 5,000 200,000 43,000

Sources: 1. PT Tambang Timah, Financial Statement, December 31, 1999.2. PT Timah Eksplomin, Financial Statement, December 31, 1999.3. PT Timah Industri, Financial Statement, December 31, 1999.4. PT Timah Investasi Mineral and Subsidiary, Consolidated Financial Statement,

December 31, 1999.

Table 3. Financial Ratios of Metal and Mineral Mining Companies on the JSX

PT Aneka TambangTbk

PT International Nickel Indonesia Tbk

1997 1998 1999 1997 1998 1999Earning (loss) per Share (Rp) 56 243 183 178 45 156Equity per Share (Rp) 913 1118 1195 4549 4594 4750Dividend per Share (Rp) - 104 79.19 - - -Closing Price (Rp) 1325 1625 1400 6800 2800 6300PER (x) 23.46 6.68 7.65 38.17 61.79 40.45PBV (x) 1.45 1.45 1.17 1.49 0.61 1.33Dividend Payout (%) - 42.71 43.28 - - -Dividend Yield (%) - 6.39 5.66 - - -Current Ratio (x) 2.78 2.99 2.46 1.77 1.00 0.72Debt to Equity (x) 0.43 0.44 0.42 0.74 0.99 1.02Leverage Ratio (x) 0.30 0.30 0.29 0.42 0.50 0.51Gross Profit Margin (x) 0.44 0.56 0.43 0.25 0.06 0.18Operating Profit Margin (x) 0.33 0.47 0.33 0.23 0.06 0.17Net Profit Margin (x) 0.15 0.29 0.23 0.14 0.04 0.10Inventory Turnover (x) 2.40 3.44 2.99 2.24 2.51 2.99Total Assets Turnover (x) 0.28 0.52 0.46 0.16 0.12 0.16ROI (%) 4.34 15.14 10.81 2.26 0.50 1.62ROE (%) 6.19 21.75 15.31 3.92 0.99 3.28Source: Indonesian Capital Market Directory 2000.

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Figure 1. Modified Du Pont Chart for Timah Tbk and Its Subsidiaries

Questions:8

Return on Equity

Return on Assets(ROA)

Equity multiplier:Assets/Equity

Multiplied by

Profit Margin: Net income/Sales

Total Assets Turnover:

Sales/Total assets

Multiplied by

Sales Net income

Divided into

TotalCosts Sales

Subtracted from

Sales Total Assets

Divided by

Fixed Assets

Current Assets

Added to

Cash on hand and in banks

Time deposits

Trade receivabl

e

Inventories

TaxesCosts of

good sold

Operating costs

Other expenses

Page 9: Case Financial Performance - PT Timah

1. Calculate some financial ratios for Timah Tbk for the last three years.

(Include the ratios of liquidity, asset management, leverage,

profitability, and market value.)

2. Evaluate the financial condition of Timah Tbk using trend analysis.

3. Evaluate the financial condition of Timah Tbk using benchmark analysis

(Antam Tbk., PGas Tbk.).

4. Construct a Du Pont system for Timah Tbk to show how some key

variables interact to determine the rate of return on equity. More

important, use your Du Pont system to analyze ways of improving the

firm’s performance. How does Du Pont differ from the previous ratio

analysis?

5. Give suggestions to improve the subsidiaries’ performance and the

performance of the overall company.

Appendix 1. Performance Assessment for State Owned Company (SOC)

According to Financial Minister Degree No. 829/1992

Profitability Liquidity Solvability Weighted Value

Very Healthy >12% >150% >200% >100%Healthy >8% - 12% >100% -

150%>150% - 200%

>68% – 100%

Less Healthy >5 – 8% >75% - 100%

>100% - 150%

>44% – 68%

Poor <= 5% <= 75% <= 100% <= 44%

Weight 75% 12.5% 12.5%

Conversion Value 12% 150% 200%Maximum Value - 300% 200%Notes: Profitability is calculated as profit before taxes divided by total assets. Liquidity is calculated as current assets divided by current liabilities. Solvability is calculated as total assets divided by total liabilities. The stipulation is also for SOC’s subsidiary.

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Appendix 2. Performance Assessment for BUMNAccording to Financial Minister Decree No. 198 / kmk.016 / 1998

A. Health Level of SOC’sHealthy: AAA : total score (TS) > 95 AA : 80 < TS <= 95 A : 65 < TS <= 80Less Healthy: BBB : 50 < TS <= 65 BB : 40 < TS <= 50 B : 30 < TS <= 40Poor: CCC : 20 < TS <= 30 CC : 10 < TS <= 20 C : TS <= 10

B. Aspect and Weight of Assessment1. Financial aspect Total weight: Infrastructure : 50 Non-infrastructure : 702. Operation aspect Total weight: Infrastructure : 35 Non-infrastructure : 153. Administration aspect Total weight: Infrastructure : 15 Non-infrastructure : 15

C. Financial Indicators and Its Weight

IndicatorsWeight

Infrastructure Non-infrastructure

1. Return on equity (ROE) 15 202. Return on investment (ROI) 10 153. Cash ratio 3 54. Current ratio 4 55. Collection periods 4 56. Inventory turnover 4 57. Total assets turnover 4 58. Common equity to total assets 6 10

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D. Methods and Scores of Assessment1. ROE = (Earning after tax / Common equity) x 100%

ROE (%)Score

Infrastructure Non-infrastructure15 < ROE 15 2013 < ROE <= 15 13.5 1811 < ROE <=13 12 1610 < ROE <= 11 10.5 147.9 < ROE <= 9 9 126.6 < ROE <= 7.9 7.5 105.3 < ROE <= 6.6 6 8.54 < ROE <= 5.3 5 72.5 < ROE <= 4 4 5.51 < ROE <= 2.5 3 40 < ROE <= 1 1.5 2ROE <= 0 1 0

2. ROI = ((EBIT + Depreciation) / Total assets*) x 100%

ROI (%)ScoreInfrastructure Non-infrastructure

18 < ROI 10 1515 < ROI <= 18 9 13.513 < ROI <=15 8 1212 < ROI <= 13 7 10.510.5 < ROI <= 12 6 99 < ROI <= 10.5 5 7.57 < ROI <= 9 4 65 < ROI <= 7 3.5 53 < ROI <= 5 3 41 < ROI <= 3 2.5 30 < ROI <= 1 2 2ROI <= 0 0 1* Total assets are an approximately of capital employed.

3. Cash ratio = ((Cash + Bank + Short-term investments) / Current liabilities) x 100%

Cash ratio = X (%)ScoreInfrastructure Non-infrastructure

X >= 35 3 525 <= X < 35 2.5 415 <= X < 25 2 310 <= X < 15 1.5 25 <= X < 10 1 10 <= X < 5 0 0

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4. Current ratio = (Current assets / Current liabilities) x 100%

Current ratio = X (%)ScoreInfrastructure Non-infrastructure

125 <= X 3 5110 <= X < 125 2.5 4100 <= X < 110 2 395 <= X < 100 1.5 290 <= X < 95 1 1X < 90 0 0

5. Collection periods = (Receivables / Sales) x 365Collection periods = X (days)

Improvement = X (days)

ScoreInfrastructure Non-

infrastructureX <= 60 X > 35 4 560 < X <= 90 30 < X <= 35 3.5 4.590 < X <= 120 25 < X <= 30 3 4120 < X <= 150 20 < X <= 25 2.5 3.5150 < X <= 180 15 < X <= 20 2 3180 < X <= 210 10 < X <= 15 1.6 2.4210 < X <= 240 6 < X <= 10 1.2 1.8240 < X <= 270 3 < X <= 6 0.8 1.2270 < X <= 300 1 < X <= 3 0.4 0.6300 < X 0 < X <= 1 0 0

6. Inventory turnover = (Inventories / Sales) x 365Inventory turnover = X (days)

Improvement = X (days)

ScoreInfrastructure Non-

infrastructureX <= 60 35 < X 4 560 < X <= 90 30 < X <= 35 3.5 4.590 < X <= 120 25 < X <= 30 3 4120 < X <= 150 20 < X <= 25 2.5 3.5150 < X <= 180 15 < X <= 20 2 3180 < X <= 210 10 < X <= 15 1.6 2.4210 < X <= 240 6 < X <= 10 1.2 1.8240 < X <= 270 3 < X <= 6 0.8 1.2270 < X <= 300 1 < X <= 3 0.4 0.6300 < X 0 < X <= 1 0 0

7. Total assets turnover = (Sales / Total assets) x 100%

Total assets turnover = X (%)

Improvement = X (%)

ScoreInfrastructure Non-

infrastructure120 < X 20 < X 4 5105 < X <= 120 15 < X <= 20 3.5 4.590 < X <= 105 10 < X <= 15 3 475 < X <= 90 5 < X <= 10 2.5 3.560 < X <= 75 0 < X <= 5 2 340 < X <= 60 X <= 0 1.5 2.520 < X <= 40 X = 0 1 3X <= 20 X < 0 0.5 1.5

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8. Common equity to total assets = (Common equity / Total assets) x 100%Common equity to Total assets (%) = X

ScoreInfrastructure Non-infrastructure

X < 0 0 00 <= X < 10 2 410 <= X < 20 3 620 <= X < 30 4 7.2530 <= X < 40 6 1040 <= X < 50 5.5 950 <= X < 60 5 8.560 <= X < 70 4.5 870 <= X < 80 4.25 7.580 <= X < 90 4 790 <= X < 100 3.5 6.5

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Notes:

State enterprises (BUMN) and its subsidiaries must apply this

assessment of the health level.

Because this case just assesses the financial aspect, the total score

should be adjusted by considering the financial aspect only. For

example, the level of health AAA is achieved if the total score is larger

than 95. So, this total score can be changed to 95 x 0,70 = 66.5 for the

non-infrastructure business. Doing this, it means the criteria are

adjusted. Alternatively, the criteria are not adjusted, but each calculated

total score are adjusted by dividing 0.70.

For the calculation of the collection periods, inventory turnover and total

assets turnover, the chosen score is the best between the both scores.

For example: PT “A” (BUMN Non-Infrastructure) has a collection periods

of 120 days in 1999 and 127 days in 1998. The scores in 1999 are

according to a) the level of the collection periods is 4, and b) the

improvement (7 days) is 1.8. Thus, the chosen score is the largest, that

is, 4.

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