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: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).
1 2019 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 9 ÷ 1,379 = 0.65%
Between 2015 and 2019, a significant reduction in the credit risk profile associated with accounts receivable is evident. While the gross volume of receivables remained relatively stable, the provision for doubtful accounts decreased substantially, indicating a marked improvement in the expected collectability of outstanding balances.
- Trend in Allowance for Doubtful Accounts
- The absolute value of the allowance for doubtful accounts experienced a steep decline from US$ 91 million in 2015 to a low of US$ 3 million in 2018. Although there was a modest increase to US$ 9 million in 2019, the overall trajectory remains downward, representing a substantial reduction in the reserves held against potential bad debts over the analyzed period.
- Stability of Gross Accounts Receivable
- Gross accounts receivable showed minimal volatility, fluctuating within a narrow range between US$ 1,379 million and US$ 1,501 million. The balance peaked in 2018 at US$ 1,501 million before contracting in 2019, suggesting that the decline in the allowance was not driven by a reduction in the total volume of credit extended to customers.
- Analysis of Allowance as a Percentage of Gross Receivables
- The allowance as a percentage of gross accounts receivable fell sharply from 6.47% in 2015 to 0.20% in 2018. This ratio underscores a fundamental shift in the risk assessment of the receivables portfolio. The subsequent slight increase to 0.65% in 2019 does not offset the overarching trend of diminishing credit risk or the significant lowering of the bad debt reserve relative to total outstanding receivables.
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