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 credit losses ÷ Accounts receivable, gross
= 100 × 33 ÷ 1,346 = 2.45%
An analysis of the credit loss provisions from 2018 to 2022 indicates a period of moderate volatility followed by an expansion in the total volume of outstanding receivables. While the nominal allowance for credit losses has increased over the five-year period, the proportional risk assessment relative to gross receivables has remained within a narrow range.
- Gross Accounts Receivable Trends
- Gross receivables experienced a gradual contraction between 2018 and 2020, reaching a period low of $940 million. This was followed by a significant upward trajectory, with balances increasing to $1,176 million in 2021 and $1,346 million by the end of 2022, representing a substantial increase in the total credit extended to customers.
- Allowance for Credit Losses
- The nominal allowance for credit losses grew from $26 million in 2018 to $33 million in 2022. The value remained relatively stagnant between 2019 and 2021, fluctuating between $28 million and $30 million, before seeing its most significant annual increase in 2022.
- Allowance as a Percentage of Gross Receivables
- The allowance ratio peaked at 2.98% in 2020, which coincided with the lowest level of gross receivables. This indicates a more conservative provisioning approach or an increase in perceived credit risk during that period. However, the ratio declined to 2.38% in 2021 and 2.45% in 2022, suggesting that the growth in the total receivables balance outpaced the increase in the credit loss allowance, which may point to improved credit quality or enhanced collection efficiency.
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