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: 2020-12-31), 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).
1 2020 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 34 ÷ 2,269 = 1.50%
An analysis of the credit loss provisions between 2016 and 2020 indicates a general trend of decreasing risk exposure relative to the total volume of receivables, characterized by a reduction in the allowance for doubtful accounts despite a stable gross receivable balance.
- Allowance for Doubtful Accounts
- The absolute value of the allowance for doubtful accounts experienced a steady decline for the majority of the period, falling from US$ 50 million in 2016 to US$ 32 million in 2019. A marginal increase to US$ 34 million was recorded in 2020, reflecting a stabilization of the provision following three years of consistent reductions.
- Gross Accounts Receivable
- Gross accounts receivable exhibited minimal volatility, maintaining a baseline between US$ 2,200 million and US$ 2,353 million. This consistency suggests that the volume of outstanding credit extended to customers remained stable throughout the five-year observation period.
- Allowance Ratio Analysis
- The allowance as a percentage of gross accounts receivable decreased significantly from 2.25% in 2016 to 1.61% in 2017. The ratio remained relatively low throughout the subsequent years, reaching a minimum of 1.39% in 2019. The increase to 1.50% in 2020 denotes a slight uptick in the estimated percentage of uncollectible accounts, though the overall ratio remains substantially lower than the 2016 baseline, suggesting an improvement in the quality of the receivables portfolio over the long term.
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