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: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Allowance as a percentage of accounts and notes receivable, gross = 100 × Accounts receivable reserve ÷ Accounts and notes receivable, gross
= 100 × 76 ÷ 2,462 = 3.09%
Between 2015 and 2019, a consistent expansion in gross accounts and notes receivable is observed, accompanied by a subsequent escalation in the allowance for doubtful accounts. While gross receivables grew steadily throughout the period, the reserve for these accounts experienced a significant acceleration in the final two years, suggesting a shift in the estimated collectability of outstanding balances.
- Gross Accounts and Notes Receivable Trend
- Gross receivables demonstrated continuous growth over the five-year period, rising from 1,122 million US dollars in 2015 to 2,462 million US dollars in 2019. This represents a cumulative increase of approximately 119%, reflecting a substantial expansion in total credit exposure.
- Accounts Receivable Reserve Analysis
- The reserve fluctuated during the initial years, decreasing to 20 million US dollars in 2016 before beginning a sustained upward trajectory. A significant inflection point occurred between 2017 and 2018, during which the reserve more than doubled from 29 million to 66 million US dollars, eventually reaching 76 million US dollars by the end of 2019.
- Allowance Percentage and Risk Assessment
- The allowance as a percentage of gross receivables initially declined from 2.23% in 2015 to a low of 1.17% in 2016. This trend reversed sharply in 2018, as the ratio rose to 3.01%, and continued to climb to 3.09% in 2019. The increase in this ratio indicates a more conservative approach to receivable valuation and a higher expectation of potential credit losses relative to the total balance of accounts and notes receivable.
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Allowance for Credit Losses
Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Allowance as a percentage of notes receivable, gross = 100 × Allowance for credit losses ÷ Notes receivable, gross
= 100 × 12 ÷ 138 = 8.70%
Between 2015 and 2019, a general contraction in both gross notes receivable and the corresponding allowance for credit losses is observed, though the trajectory was non-linear, characterized by a significant spike in credit risk reserves during 2017.
- Gross Notes Receivable Trend
- Gross notes receivable peaked in 2016 at 305 million US dollars before entering a consistent downward trajectory, ending at 138 million US dollars in 2019. This represents a substantial reduction in the total volume of outstanding notes over the analyzed period.
- Allowance for Credit Losses Dynamics
- The absolute value of the allowance for credit losses showed an upward trend from 2015 to 2017, reaching a maximum of 72 million US dollars. This was followed by a precipitous decline, with the allowance falling to 25 million US dollars in 2018 and further decreasing to 12 million US dollars by the end of 2019.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross notes receivable exhibited significant volatility. While the ratio remained relatively stable around 19% in 2015 and 2016, it surged to a peak of 32.58% in 2017, indicating a period of heightened perceived credit risk or a more conservative valuation of receivables. In the subsequent two years, this ratio declined sharply, reaching 16.03% in 2018 and a period low of 8.70% in 2019, suggesting a marked improvement in the credit quality of the remaining note portfolio.
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