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: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30), 10-K (reporting date: 2015-09-30), 10-K (reporting date: 2014-09-30).
1 2019 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowances ÷ Receivables, gross
= 100 × 112 ÷ 3,097 = 3.62%
An analysis of the allowance for doubtful accounts relative to gross receivables indicates a progressive increase in the estimated credit risk over the period from 2014 to 2019. While the absolute volume of receivables experienced significant fluctuations, the proportion of those receivables reserved for potential bad debts demonstrated a general upward trajectory.
- Allowance as a Percentage of Gross Receivables
- A consistent upward trend is observed in the allowance percentage, rising from 2.22% in 2014 to 3.62% in 2019. This increase suggests either a strategic shift toward a more conservative credit loss estimation or a decline in the overall credit quality of the receivables portfolio over the six-year period.
- Gross Receivables Volatility
- Gross receivables exhibited substantial volatility, characterized by a sharp decline from $5,133 million in 2014 to a low of $2,793 million in 2016. Following this contraction, receivables partially recovered and stabilized between $3,097 million and $3,457 million from 2017 through 2019.
- Absolute Allowance Trends
- The dollar value of the allowances remained relatively stable compared to the volatility of the gross receivables, fluctuating between a minimum of $91 million in 2017 and a maximum of $128 million in 2015. The fact that the allowance levels did not decrease proportionally with the decline in gross receivables between 2014 and 2016 contributed directly to the increase in the allowance percentage during those years.
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