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 accounts receivable, gross = 100 × Allowances ÷ Accounts receivable, gross
= 100 × 189 ÷ 4,849 = 3.90%
An analysis of the receivables profile between 2017 and 2021 reveals a period of relative stability in gross credit exposure contrasted by significant volatility in the valuation of doubtful accounts. While the total volume of outstanding receivables remained consistent, the company substantially increased its reserves for potential losses during the middle of the observation period.
- Gross Accounts Receivable Stability
- Gross accounts receivable exhibited minimal fluctuation over the five-year period, maintaining a range between US$ 4,849 million and US$ 5,115 million. A marginal downward trend is noted from 2018 to 2021, representing a total decrease of approximately 5.2% in gross exposure.
- Allowance for Doubtful Accounts Trajectory
- The allowance for doubtful accounts experienced a sharp escalation starting in 2019. After reaching a period low of US$ 95 million in 2018, the allowance grew to US$ 161 million in 2019 and peaked at US$ 233 million in 2020. This peak represents a 145% increase in the reserve balance compared to 2018 levels. A partial correction occurred in 2021, with the allowance decreasing to US$ 189 million.
- Credit Risk Ratio Interpretation
- The allowance as a percentage of gross accounts receivable highlights a marked shift in credit risk assessment. The ratio remained stable and low between 2017 and 2018, at 2.05% and 1.86% respectively. A significant upward trend followed, with the ratio climbing to 3.25% in 2019 and reaching a maximum of 4.72% in 2020. Although the ratio moderated to 3.90% by the end of 2021, it remained substantially elevated compared to the 2017-2018 baseline, indicating a sustained increase in the perceived risk of non-payment.
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