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 × 12,195 ÷ 166,140 = 7.34%
The financial data indicates a period of steady growth in total credit exposure coupled with a significant fluctuation in the reserves maintained for credit losses. While gross receivables have expanded consistently, the allowance for credit losses experienced a sharp peak in 2020 followed by a gradual decline.
- Gross Accounts Receivable Growth
- A consistent upward trajectory is observed in gross accounts receivable, which increased from 94,901 thousand US dollars in 2018 to 166,140 thousand US dollars by 2022. This steady expansion indicates a significant increase in the volume of outstanding credit extended to customers over the analyzed five-year period.
- Allowance for Credit Losses Volatility
- The allowance for credit losses exhibited substantial volatility. After a slight decrease between 2018 and 2019, the allowance surged to 15,110 thousand US dollars in 2020. This peak was followed by two consecutive years of decline, ending at 12,195 thousand US dollars in 2022, despite the continued growth in gross receivables.
- Credit Loss Ratio Trends
- The allowance as a percentage of gross accounts receivable highlights a sharp increase in perceived credit risk in 2020, where the ratio peaked at 12.69%. This represents a more than twofold increase from the 5.24% recorded in 2019. From 2021 onward, the ratio trended downward to 7.34% by 2022, suggesting a normalization of credit risk assessments or an improvement in the collectability of the receivables portfolio.
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