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: 2019-12-28), 10-K (reporting date: 2018-12-29), 10-K (reporting date: 2017-12-30), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowances related to trade accounts receivable ÷ Trade receivables, gross
= 100 × 33 ÷ 2,006 = 1.65%
Between 2015 and 2019, the management of trade receivables and the associated allowance for doubtful accounts exhibited significant volatility, characterized by a substantial expansion of the gross receivables balance and a corresponding decline in the allowance percentage.
- Gross Trade Receivables Trend
- Gross receivables remained relatively stable between 2015 and 2017, fluctuating between 789 million and 944 million US dollars. A sharp increase occurred in 2018, where the balance rose to 2,153 million US dollars, representing more than a twofold increase from the previous year. This balance remained elevated through 2019, closing at 2,006 million US dollars.
- Allowance for Doubtful Accounts
- The absolute value of allowances related to trade accounts receivable showed a non-linear trend. After decreasing from 32 million US dollars in 2015 to 20 million US dollars in 2016, the allowance grew gradually to reach 33 million US dollars by the end of 2019.
- Allowance Percentage and Credit Risk Interpretation
- The allowance as a percentage of gross trade receivables followed a consistent downward trajectory from 3.54% in 2015 to a period low of 1.11% in 2018. This decline is particularly pronounced in 2018, as the allowance percentage dropped significantly despite the massive surge in gross receivables. While the ratio increased slightly to 1.65% in 2019, it remained well below the levels observed from 2015 to 2017, suggesting a shift in credit risk estimation or an improvement in the perceived collectability of the receivables balance.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
How can I help you?