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: 2020-12-31), 10-K (reporting date: 2019-12-29), 10-K (reporting date: 2018-12-30), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).
1 2020 Calculation
Allowance as a percentage of trade accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Trade accounts receivable, gross
= 100 × 4 ÷ 491 = 0.81%
The analysis of credit risk provisions reveals a distinct trend of decreasing allowance requirements relative to gross receivables from 2016 through 2019, followed by a reversal in 2020.
- Gross Trade Accounts Receivable Trends
- A steady upward trajectory in gross trade accounts receivable was observed between 2016 and 2019, increasing from 386 million US$ to a peak of 575 million US$. This growth indicates an expansion in credit sales or a slowdown in collections during this period. However, a contraction occurred in 2020, with the balance decreasing to 491 million US$.
- Allowance for Doubtful Accounts Movement
- The absolute value of the allowance for doubtful accounts exhibited an inverse relationship with gross receivables from 2016 to 2019, declining from 4 million US$ to 2 million US$. This downward trend suggests either an improvement in the credit quality of the customer base or a more optimistic estimation of recoverability. In 2020, the allowance returned to 4 million US$, representing a 100% increase from the previous year.
- Allowance Percentage Analysis
- The allowance as a percentage of gross trade accounts receivable declined significantly from 1.10% in 2016 to a low of 0.35% in 2019. This consistent compression of the ratio indicates a period of high efficiency in credit management or a reduction in expected credit losses. The trend reversed sharply in 2020, with the ratio rising to 0.81%, reflecting a combined effect of lower gross receivables and a higher absolute allowance, which suggests an increased anticipation of bad debt losses.
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