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.
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Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2014-12-27), 10-K (reporting date: 2013-12-28), 10-K (reporting date: 2012-12-29).
1 2014 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowances related to accounts receivable ÷ Receivables, gross
= 100 × ÷ =
- Accounts Receivable Allowances Trend
- The allowances related to accounts receivable declined steadily over the three-year period, from US$28 million in 2012 to US$21 million in 2014. This represents a decrease of approximately 25% over the period, indicating a reduction in estimated potential credit losses.
- Gross Receivables
- The gross receivables exhibited slight fluctuations during the same period. Initially, they decreased from US$1117 million in 2012 to US$1074 million in 2013, followed by a modest increase to US$1101 million in 2014. Despite these changes, the overall receivables remained relatively stable across the three years.
- Allowance as a Percentage of Gross Receivables
- The allowance as a percentage of gross receivables showed a consistent downward trend, moving from 2.51% in 2012 to 1.91% in 2014. This suggests an improvement in credit quality or tighter credit control policies, resulting in a smaller proportion of receivables being reserved for potential losses.
- Summary Insight
- Overall, the data signifies a positive development in the management of accounts receivable, with decreasing allowances indicating improved collection performance or lower risk of default. The relatively stable gross receivables indicate steady sales or credit extension levels, while the declining allowance ratio demonstrates enhanced efficiency in credit risk assessment or recovery processes.