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: 2015-12-31), 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).
1 2015 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × 103 ÷ 1,356 = 7.60%
A divergent trend is observed between the growth of the allowance for doubtful accounts and the contraction of gross receivables over the period from 2011 to 2015. While the absolute volume of receivables declined significantly, the provision for potential credit losses increased consistently, leading to a substantial rise in the allowance as a percentage of gross receivables.
- Allowance for Doubtful Accounts
- The allowance for doubtful accounts exhibited a steady upward trajectory, increasing from 58 million US dollars in 2011 to 103 million US dollars by 2015. This consistent growth indicates a rising expectation of credit losses over the five-year period.
- Gross Receivables Volume
- Gross receivables experienced a significant downward trend, falling from 3,137 million US dollars in 2011 to 1,356 million US dollars in 2015. This represents a reduction of more than 50% in the total outstanding receivables balance.
- Credit Quality and Risk Exposure
- The allowance as a percentage of gross receivables rose sharply from 1.85% in 2011 to 7.60% in 2015. This acceleration suggests a deterioration in the overall credit quality of the receivables portfolio or a strategic shift toward a more conservative estimation of uncollectible accounts.
The combination of shrinking gross receivables and an expanding allowance suggests that a larger proportion of the remaining receivables is deemed high-risk. The credit risk profile appears to have intensified, as the percentage of the portfolio reserved for bad debts more than quadrupled over the analyzed timeframe.
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