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: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 10,343 ÷ 870,028 = 1.19%
An analysis of the accounts receivable and associated allowances from 2018 to 2022 reveals a general upward trend in both total credit exposure and the provisions held for potential losses. While gross receivables experienced significant growth through 2021, the allowance for doubtful accounts grew at a proportionally faster rate during the early part of the period, suggesting a shift in the credit risk profile or a change in accounting conservatism.
- Gross Accounts Receivable Trends
- Gross accounts receivable exhibited a consistent increase from 441.4 million in 2018 to a peak of 906.4 million in 2021. A slight contraction occurred in 2022, with the balance decreasing to 870.0 million. This indicates a substantial expansion of the company's credit extension to customers over the five-year window.
- Allowance for Doubtful Accounts Absolute Growth
- The absolute value of the allowance for doubtful accounts rose from 2.4 million in 2018 to 10.3 million in 2022. Despite a minor decrease in 2021 to 9.2 million, the overall trajectory remains sharply upward, reflecting an increase in the total funds reserved to cover anticipated credit losses.
- Allowance Ratio Dynamics
- The allowance as a percentage of gross accounts receivable nearly tripled between 2018 and 2020, rising from 0.54% to 1.53%. A subsequent decrease to 1.02% in 2021 was followed by a moderate increase to 1.19% in 2022. This volatility indicates a period of heightened risk assessment around 2020, followed by a relative stabilization of the allowance ratio above the 2018 baseline.
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