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: 2019-05-26), 10-K (reporting date: 2018-05-27), 10-K (reporting date: 2017-05-28), 10-K (reporting date: 2016-05-29), 10-K (reporting date: 2015-05-31), 10-K (reporting date: 2014-05-25).
1 2019 Calculation
Allowance as a percentage of receivables, customers = 100 × Allowance for doubtful accounts ÷ Receivables, customers
= 100 × 28,800 ÷ 1,708,500 = 1.69%
Between fiscal years 2014 and 2019, the financial position regarding credit risk exhibits a general upward trend in both the total allowance for doubtful accounts and gross customer receivables, characterized by a period of volatility followed by relative stabilization.
- Allowance for Doubtful Accounts
- The absolute value of the allowance for doubtful accounts grew from US$ 21 million in 2014 to US$ 28.8 million in 2019. A steady increase was observed through 2016, where the allowance peaked at US$ 29.6 million. A notable decline occurred in 2017, dropping to US$ 24.3 million, before recovering and stabilizing near US$ 28.8 million by the end of the period.
- Customer Receivables
- Gross receivables experienced a slight contraction between 2014 and 2016, falling from US$ 1.50 billion to US$ 1.39 billion. Following this decline, a significant expansion occurred, with receivables rising to US$ 1.71 billion by 2018. The balance remained nearly constant into 2019, closing at US$ 1.71 billion.
- Allowance as a Percentage of Receivables
- The allowance ratio demonstrates a peak in 2016 at 2.13%, compared to 1.40% in 2014. This indicates a period of increased credit risk provision relative to the volume of receivables. Subsequent to 2016, the ratio corrected and stabilized, maintaining a consistent range between 1.66% and 1.69% from 2017 through 2019. This stabilization suggests that the company's credit loss expectations aligned proportionally with the growth in its receivables balance during the latter half of the analyzed period.
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