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).
1 2021 Calculation
Allowance as a percentage of trade accounts receivable, gross = 100 × Allowance for expected credit losses ÷ Trade accounts receivable, gross
= 100 × 7 ÷ 1,155 = 0.61%
The analysis of credit risk management between 2018 and 2021 reveals a period of relative stability interrupted by a significant increase in expected credit losses during 2020. While gross receivables remained comparatively consistent throughout the period, the allowance for losses exhibited notable volatility, peaking in 2020 before retreating to the lowest level recorded in the four-year window.
- Allowance for Expected Credit Losses
- The allowance remained stable at 8 million and 9 million US dollars in 2018 and 2019, respectively. A substantial increase occurred in 2020, where the allowance rose to 21 million US dollars, representing a 133% increase from the previous year. This upward trend reversed sharply in 2021, with the allowance falling to 7 million US dollars.
- Gross Trade Accounts Receivable
- Gross receivables fluctuated within a narrow range, starting at 1,158 million US dollars in 2018, dipping slightly to 1,069 million US dollars by 2020, and recovering to 1,155 million US dollars in 2021. The relative stability of these figures suggests that the fluctuations in the allowance were driven by changes in risk assessment rather than significant shifts in total credit exposure.
- Allowance as a Percentage of Gross Trade Accounts Receivable
- The ratio of the allowance to gross receivables remained below 1% for most of the analyzed period, recording 0.69% in 2018 and 0.80% in 2019. In 2020, this ratio peaked at 1.96%, indicating a marked increase in the perceived risk of default. By 2021, the ratio declined to 0.61%, suggesting a significant improvement in the credit quality of the receivables or a reduction in the estimated probability of loss.
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