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: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30), 10-K (reporting date: 2016-06-30).
1 2021 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 79,600 ÷ 2,807,000 = 2.84%
The analysis of credit risk provisions reveals a general upward trajectory in both gross receivables and the corresponding allowance for doubtful accounts over the six-year period from 2016 to 2021. While gross receivables exhibited consistent growth, the allowance for doubtful accounts demonstrated significant volatility, particularly during the 2020 fiscal year.
- Gross Accounts Receivable Growth
- Gross accounts receivable increased from 1,780,900 thousand US dollars in 2016 to 2,807,000 thousand US dollars in 2021. Aside from a marginal decline in 2017, the trend shows a steady expansion of the credit extended to customers, reflecting an overall increase in the volume of outstanding receivables.
- Allowance for Doubtful Accounts Trends
- The allowance for doubtful accounts grew steadily from 38,100 thousand US dollars in 2016 to 54,900 thousand US dollars in 2019. A substantial spike occurred in 2020, where the allowance reached a peak of 92,500 thousand US dollars. This was followed by a reduction to 79,600 thousand US dollars in 2021, although the level remained significantly higher than the pre-2020 baseline.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross accounts receivable fluctuated between a low of 2.14% in 2016 and a peak of 3.65% in 2020. The sharp increase in 2020 suggests a heightened perception of credit risk or a conservative adjustment in the valuation of receivables during that period. By 2021, the ratio normalized to 2.84%, indicating a partial recovery in credit quality or a revision of the risk assessment models.
In summary, the expansion of the gross receivables portfolio has been accompanied by an increase in the provision for bad debts. The volatility observed in 2020 represents a distinct departure from the previous trend, characterized by a sharp increase in the risk reserve that partially receded in the following year.
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