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: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31).
1 2017 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × 95,300 ÷ 7,151,600 = 1.33%
The financial data reveals a divergence between the growth of gross receivables and the valuation of the allowance for doubtful accounts from 2013 to 2017. While the total amount of receivables increased steadily, the reserve set aside for potential bad debts generally decreased, suggesting an improvement in the quality of the receivables portfolio or a refinement in credit risk management.
- Gross Receivables Trend
- Gross receivables experienced consistent growth over the five-year period, rising from 4,225,100 thousand US dollars in 2013 to 7,151,600 thousand US dollars by 2017. The most significant expansion occurred between 2013 and 2014, where receivables increased by approximately 45%.
- Allowance for Doubtful Accounts
- The allowance for doubtful accounts followed an inverse trajectory to gross receivables for the majority of the period. The balance decreased significantly from 202,200 thousand US dollars in 2013 to a minimum of 75,000 thousand US dollars in 2016. A reversal of this trend occurred in 2017, with the allowance increasing to 95,300 thousand US dollars.
- Credit Risk Proportion
- The allowance as a percentage of gross receivables declined sharply from 4.79% in 2013 to 1.05% in 2016. This contraction indicates a substantial reduction in the estimated credit risk associated with the outstanding receivables balance. However, the ratio increased slightly to 1.33% in 2017, aligning with the increase in the absolute allowance balance and suggesting a slight uptick in the estimated risk of non-payment.
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