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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Reserves for allowances ÷ Accounts receivable, gross
= 100 × 38,000 ÷ 1,587,400 = 2.39%
The analysis of the reserves for allowances and gross accounts receivable from 2017 to 2021 indicates a period of moderate volatility followed by a notable contraction in the total receivables balance. The company maintained a relatively stable credit risk profile, with the allowance for doubtful accounts consistently representing a small fraction of the total gross receivables.
- Reserves for Allowances Trend
- The absolute value of reserves for allowances experienced fluctuations over the five-year period. A significant decrease occurred between 2017 and 2018, where reserves dropped from US$ 46 million to US$ 34.7 million. This was followed by a gradual recovery, peaking at US$ 41.6 million in 2020, before declining slightly to US$ 38 million by the end of 2021.
- Gross Accounts Receivable Dynamics
- Gross accounts receivable remained relatively stable between 2017 and 2020, fluctuating within a range of approximately US$ 1.83 billion to US$ 1.99 billion. However, a substantial reduction is observed in 2021, with the balance falling to US$ 1.587 billion, representing a decrease of approximately 18.8% from the previous year.
- Allowance Ratio Analysis
- The allowance as a percentage of gross accounts receivable provides insight into the perceived credit quality of the receivables portfolio. The ratio reached a five-year low of 1.74% in 2018, suggesting either an improvement in collection efficiency or a more optimistic outlook on recoverability. From 2019 through 2021, there was a steady upward trend in this ratio, rising from 2.11% to 2.39%. This increase in the percentage, despite the overall decrease in gross receivables in 2021, indicates a more conservative approach to bad debt provisioning toward the end of the period.
Overall, the correlation between the decrease in gross receivables and the increase in the allowance percentage during 2021 suggests a strategic shift in the management of receivables or a change in the risk profile of the remaining outstanding balances.
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