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: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31), 10-K (reporting date: 2011-12-31), 10-K (reporting date: 2010-12-31).
1 2014 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowance for doubtful accounts ÷ Trade receivables, gross
= 100 × 66,700 ÷ 981,200 = 6.80%
Between 2010 and 2014, a consistent increase in gross trade receivables is observed, while the allowance for doubtful accounts exhibits a volatile trend, culminating in a significant spike in the final year of the period.
- Gross Trade Receivables Growth
- Trade receivables, gross, demonstrated a steady upward trajectory, increasing from US$ 676.3 million in 2010 to US$ 981.2 million in 2014. This indicates a continuous expansion of the company's credit exposure to its customers over the five-year interval.
- Allowance for Doubtful Accounts Fluctuations
- The allowance for doubtful accounts remained relatively stable from 2010 through 2013, with values ranging between US$ 24.2 million and US$ 31.9 million. However, a sharp increase is noted in 2014, with the allowance rising to US$ 66.7 million, representing an increase of approximately 175% over the 2013 balance.
- Analysis of the Allowance Percentage
- The allowance as a percentage of gross trade receivables followed a declining trend for the first four years, falling from 4.29% in 2010 to a period low of 2.67% in 2013. This contraction suggested an improving credit profile or more efficient collection processes. This trend reversed abruptly in 2014, when the ratio climbed to 6.80%, the highest percentage recorded in the analyzed period.
The divergence observed in 2014, where the allowance increased disproportionately to the growth in gross receivables, indicates a significant shift in the assessment of credit risk or a change in the accounting estimates regarding the collectability of outstanding trade receivables.
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