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: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
1 2016 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowances for doubtful accounts ÷ Receivables, gross
= 100 × 212 ÷ 18,192 = 1.17%
An analysis of the credit risk profile indicates a period of substantial growth in gross receivables coupled with fluctuating allowance levels. While the absolute value of the allowance remained relatively stable for several years, a significant upward adjustment occurred toward the end of the observed period.
- Gross Receivables Expansion
- A consistent upward trajectory is observed in gross receivables, which increased from 9,311 million USD in 2011 to 18,192 million USD by 2016. A particularly notable acceleration occurred between 2013 and 2014, where receivables grew from 10,096 million USD to 14,306 million USD, representing a significant expansion of the credit portfolio.
- Allowance for Doubtful Accounts Volatility
- The absolute value of allowances for doubtful accounts remained relatively range-bound between 2011 and 2014, fluctuating between 111 million USD and 124 million USD. This pattern shifted abruptly in 2015 and 2016, with the allowance rising to 141 million USD and then sharply increasing to 212 million USD, respectively.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross receivables experienced a decline from 1.33% in 2011 to a period low of 0.79% in 2014. This indicates that during the initial expansion of receivables, the provision for bad debts did not grow proportionally, suggesting either improved credit quality or a more aggressive estimation policy. However, by 2016, the ratio increased to 1.17%, signaling a correction in the risk assessment or an increase in the expected rate of default as the total receivables balance reached its peak.
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