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 and notes receivable, gross = 100 × Allowance ÷ Accounts and notes receivable, gross
= 100 × 2,176 ÷ 360,366 = 0.60%
The financial data indicates a significant divergence between the growth of gross receivables and the allocation for doubtful accounts over the five-year period ending December 31, 2022. While the volume of outstanding receivables expanded rapidly, the provision for potential losses remained relatively stagnant, leading to a consistent decline in the allowance ratio.
- Gross Accounts and Notes Receivable Trends
- A sustained and aggressive increase in gross accounts and notes receivable is observed, rising from 132,461 thousand US dollars in 2018 to 360,366 thousand US dollars in 2022. This represents a substantial growth in the credit extended to customers, reflecting a significant expansion in the scale of operations or a shift in billing cycles.
- Allowance for Doubtful Accounts Stability
- In contrast to the growth in receivables, the absolute value of the allowance remained relatively stable. After a slight decrease in 2019 to 1,567 thousand US dollars, the allowance trended upward to peak at 2,203 thousand US dollars in 2021, before settling at 2,176 thousand US dollars by the end of 2022. The lack of proportional growth in the allowance suggests a high level of confidence in the collectability of the expanding receivable balance.
- Analysis of the Allowance Percentage
- The allowance as a percentage of gross accounts and notes receivable exhibits a continuous downward trajectory, decreasing every year from 1.42% in 2018 to 0.60% in 2022. This steady decline indicates an improvement in the quality of the receivables portfolio or the implementation of more stringent credit risk management practices, as the projected loss rate has more than halved despite the growth in total exposure.
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