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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowance for credit losses ÷ Receivables, gross
= 100 × 54 ÷ 2,500 = 2.16%
The analysis of credit risk management from 2017 to 2021 indicates a period of relative stability in the allowance for credit losses despite fluctuations in gross receivables. The organization has maintained a consistent approach to provisioning for doubtful accounts, with the allowance remaining within a narrow range of 46 million to 59 million US dollars.
- Gross Receivables Trajectory
- A significant expansion in gross receivables occurred between 2017 and 2018, increasing from 1,893 million to 2,666 million US dollars. Following this peak, receivables remained relatively stable, experiencing a slight downward trend to 2,500 million US dollars by the end of 2021.
- Allowance for Credit Losses Trends
- The nominal value of the allowance for credit losses showed minimal volatility. After a decrease to 46 million US dollars in 2018, the allowance climbed steadily to a five-year peak of 59 million US dollars in 2020, before moderating to 54 million US dollars in 2021.
- Credit Loss Ratio Analysis
- The allowance as a percentage of gross receivables reached its highest point in 2017 at 2.91%. A sharp decline to 1.73% was observed in 2018, coinciding with the surge in gross receivables, which suggests either an improvement in the quality of the receivables portfolio or a shift in the estimation methodology during that period. From 2019 through 2020, the ratio trended upward, peaking at 2.27% in 2020, likely reflecting an increased anticipation of credit risk, before settling at 2.16% in 2021.
Overall, the correlation between the growth in gross receivables and the credit loss allowance suggests a disciplined approach to risk provisioning. The stability of the ratio between 2018 and 2021 indicates that the company's expectations regarding uncollectible accounts have remained consistent relative to the total volume of outstanding receivables.
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