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: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30).
1 2021 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowance for doubtful accounts ÷ Trade receivables, gross
= 100 × 76 ÷ 2,573 = 2.95%
An analysis of the credit risk profile from fiscal year 2016 through 2021 reveals a period of significant expansion in gross trade receivables accompanied by a disciplined and stable approach to bad debt provisioning.
- Gross Trade Receivables Trend
- Gross trade receivables experienced a consistent upward trajectory, increasing from 1,679 million US$ in 2016 to 2,573 million US$ by 2021. A notable acceleration in growth occurred between 2017 and 2018, where balances rose from 1,798 million US$ to 2,394 million US$, representing a substantial increase in the total volume of outstanding credit extended to customers.
- Allowance for Doubtful Accounts Volatility
- The absolute value of the allowance for doubtful accounts exhibited moderate fluctuations, starting at 61 million US$ in 2016 and ending at 76 million US$ in 2021. The allowance peaked in 2020 at 80 million US$ before experiencing a slight contraction in the final year of the period. Despite the growth in total receivables, the allowance did not increase linearly, suggesting a managed approach to credit loss expectations.
- Credit Loss Ratio Stability
- The allowance as a percentage of gross trade receivables remained remarkably stable, fluctuating within a narrow corridor between 2.95% and 3.63%. After an initial decline from 3.63% in 2016 to 3.00% in 2017, the ratio maintained a tight range around 3.1% for several years, eventually reaching its lowest point of 2.95% in 2021. This consistency indicates that the company's credit risk management and the quality of its receivables portfolio remained steady even as the scale of operations expanded.
The overall data suggests that the increase in the total volume of trade receivables has not led to a proportional increase in credit risk. The stability of the allowance percentage implies that the company's credit policies and the creditworthiness of its customer base have remained constant over the observed six-year period.
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