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 doubtful accounts ÷ Accounts receivable, gross
= 100 × 7,300 ÷ 720,600 = 1.01%
A significant divergence is observed between the growth of gross accounts receivable and the corresponding allowance for doubtful accounts over the five-year period ending December 31, 2022.
- Gross Accounts Receivable Expansion
- There is a consistent and substantial upward trend in gross accounts receivable, which increased from 233.9 million US dollars in 2018 to 720.6 million US dollars in 2022. This represents a growth of approximately 208% over the analyzed period, indicating a rapid expansion in the volume of credit extended to customers.
- Stability of the Allowance for Doubtful Accounts
- Unlike the gross receivables, the allowance for doubtful accounts remained relatively stagnant in absolute terms. The balance fluctuated within a narrow range, starting at 7.2 million US dollars in 2018 and ending at 7.3 million US dollars in 2022, without exhibiting a growth pattern that correlates with the increase in total receivables.
- Decline in Allowance Ratio
- The allowance as a percentage of gross accounts receivable shows a steady and marked decline, falling from 3.08% in 2018 to 1.01% in 2022. This suggests that the reserve for bad debts is being maintained at a decreasing proportion relative to the total credit exposure.
The data indicates that while the asset base of accounts receivable has expanded more than threefold, the risk provision has not scaled accordingly. This pattern typically suggests either an improvement in the credit quality of the customer base, more efficient collection processes, or a shift in the management's estimation of potential credit losses. However, the continuous compression of the allowance ratio implies a higher reliance on the collectability of an increasingly larger pool of receivables.
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