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 receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 110,800 ÷ 3,303,100 = 3.35%
An analysis of the credit risk provisions from 2015 to 2019 reveals a general upward trend in both the absolute value of the allowance for doubtful accounts and the total gross accounts receivable. The relationship between these two metrics indicates a consistent approach to managing credit risk despite fluctuations in the overall volume of receivables.
- Allowance for Doubtful Accounts
- The allowance for doubtful accounts exhibited a steady increase over the majority of the period. After a slight decrease from 80,600 thousand US$ in 2015 to 75,700 thousand US$ in 2016, the provision grew consistently each year, reaching 110,800 thousand US$ by December 31, 2019. This represents a total increase of approximately 37.4% from the 2015 baseline.
- Gross Accounts Receivable
- Gross accounts receivable demonstrated a strong growth trajectory, rising from 2,482,200 thousand US$ in 2015 to 3,303,100 thousand US$ in 2019. A minor contraction occurred in 2018, where values dipped to 2,969,800 thousand US$ from the previous year's 2,992,000 thousand US$, before recovering sharply in 2019.
- Allowance as a Percentage of Gross Accounts Receivable
- The allowance ratio remained relatively stable, fluctuating within a narrow range between 2.90% and 3.42%. The ratio reached its lowest point in 2016 at 2.90% and peaked in 2018 at 3.42%. By 2019, the ratio settled at 3.35%, suggesting that the company maintained a consistent risk assessment methodology relative to its total credit exposure.
The alignment between the growth in gross receivables and the corresponding increase in the allowance for doubtful accounts suggests that the expansion of credit sales was managed with a proportional increase in risk provisions. The stability of the percentage ratio indicates that the quality of the receivables portfolio remained consistent over the five-year period.
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