Analysis of Bad Debts
Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company gross accounts receivable. The relationship between the allowance and the balance in receivables should be relatively constant unless there is a change in the economy overall or a change in customer base.
Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for expected credit losses ÷ Accounts receivable, gross
= 100 × 65 ÷ 1,329 = 4.89%
The analysis of the allowance for expected credit losses reveals a period of stability followed by significant volatility between 2020 and 2021. From 2017 to 2019, the credit risk profile remained consistent, but 2020 marked a sharp divergence in both the volume of receivables and the estimated loss provisions.
- Gross Accounts Receivable
- Receivables grew steadily from US$ 1,897 million in 2017 to a peak of US$ 2,565 million in 2019. A precipitous decline occurred in 2020, where balances fell to US$ 802 million, before entering a recovery phase to reach US$ 1,329 million by the end of 2021.
- Allowance for Expected Credit Losses
- The allowance remained relatively low and stable through 2019, increasing marginally from US$ 31 million to US$ 41 million. In 2020, the allowance spiked to US$ 101 million despite the contraction in gross receivables, indicating a heightened perception of credit risk. This figure subsequently moderated to US$ 65 million in 2021.
- Allowance as a Percentage of Gross Accounts Receivable
- The credit loss ratio exhibited minimal variance between 2017 and 2019, fluctuating within a tight range between 1.56% and 1.62%. A dramatic increase to 12.59% was recorded in 2020, representing a substantial escalation in the risk allocation relative to the total asset base. By 2021, this ratio decreased to 4.89%, although it remains significantly elevated compared to the pre-2020 baseline.
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