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.
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Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for credit losses on accounts receivable ÷ Accounts receivable, gross
= 100 × ÷ =
The data indicates several notable trends over the period from 2020 to 2024 regarding accounts receivable and associated credit loss allowances.
- Gross Accounts Receivable
- There is a consistent upward trend in the gross accounts receivable, increasing from US$31,719 million in 2020 to US$53,219 million in 2024. This growth represents a substantial rise in outstanding receivables, reflecting business expansion or increased sales on credit during the period.
- Allowance for Credit Losses
- The allowance for credit losses on accounts receivable shows some fluctuation but generally trends upward, moving from US$789 million in 2020 to US$879 million in 2024. Despite minor decreases and increases in intermediate years, the allowance increases by US$90 million over the five-year span, suggesting a cautious approach toward potential credit risks as receivables grow.
- Allowance as Percentage of Gross Accounts Receivable
- The allowance as a percentage of gross accounts receivable declines sharply from 2.49% in 2020 to a low of 1.38% in 2021. Subsequently, this ratio fluctuates slightly but remains below the 2020 level, finishing at 1.65% in 2024. This trend indicates that although the absolute allowance amount has grown modestly, it has not kept pace proportionately with the rapid increase in gross accounts receivable, implying an improvement in credit quality or more efficient credit risk management over time.
Overall, the rising gross accounts receivable combined with a proportionally lower allowance percentage suggests increased sales on credit with a relatively stable or improving credit risk profile. The company appears to manage credit losses effectively while experiencing revenue growth, reflecting positively on its financial health and credit policies.