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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- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Profitability Ratios
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Price to FCFE (P/FCFE)
- Capital Asset Pricing Model (CAPM)
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- Operating Profit Margin since 2005
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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 × ÷ =
The financial data reveals several notable trends in the accounts receivable and related reserves over the five-year period ending December 31, 2019.
- Accounts Receivable Reserve
- The accounts receivable reserve, expressed in millions of US dollars, exhibited a fluctuating but overall increasing trend. Starting at 25 million in 2015, it decreased to 20 million in 2016, then rose significantly in the subsequent years, reaching 66 million in 2018 and further increasing to 76 million by the end of 2019. This increase suggests a growing concern or anticipation of potential bad debts.
- Accounts and Notes Receivable, Gross
- The gross accounts and notes receivable showed a consistent upward trajectory across the reviewed periods. Beginning at 1,122 million in 2015, there was a substantial increase in 2016 to 1,712 million, followed by further growth to 2,013 million in 2017, 2,193 million in 2018, and peaking at 2,462 million in 2019. This steady rise indicates expanding revenue or credit sales on the company’s part.
- Allowance as a Percentage of Accounts and Notes Receivable, Gross
- The allowance ratio, which measures the accounts receivable reserve as a percentage of the gross accounts and notes receivable, initially declined from 2.23% in 2015 to 1.17% in 2016. Afterward, it experienced a gradual increase, rising to 1.44% in 2017, then more sharply to 3.01% in 2018, and slightly higher to 3.09% in 2019. This pattern may reflect adjustments in the company’s policy or an increased expectation of credit risk over time.
In summary, the data indicates a growing volume of accounts receivable accompanied by an increasing allowance for doubtful accounts, particularly in the last two years. This suggests heightened caution or risk management concerning credit collections, possibly in response to changing market or customer conditions.
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 × ÷ =
- Allowance for credit losses
- The allowance for credit losses exhibited a general downward trend over the five-year period. Starting at $55 million in 2015, it slightly increased to $57 million in 2016 and then rose notably to $72 million in 2017. Thereafter, there was a significant decrease, dropping to $25 million in 2018 and further down to $12 million in 2019.
- Notes receivable, gross
- The gross notes receivable declined steadily each year. From $276 million in 2015, it increased slightly to $305 million in 2016 but then decreased consistently over the next three years to $221 million in 2017, $156 million in 2018, and $138 million in 2019.
- Allowance as a percentage of notes receivable, gross
- The percentage ratio of allowance to gross notes receivable experienced marked fluctuations. Initially high at approximately 20% in 2015, it decreased modestly to about 18.7% in 2016, before surging to 32.6% in 2017. Subsequently, it declined sharply to 16% in 2018 and further to 8.7% in 2019, indicating a reduction in the proportion of allowances relative to receivables.