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: 2023-12-31), 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).
1 2023 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts, sales returns and cash discounts ÷ Accounts receivable, gross
= 100 × 7,638 ÷ 1,201,602 = 0.64%
The analysis of the allowance for doubtful accounts indicates a period of volatility in credit risk management against a backdrop of consistent growth in total receivables.
- Gross Accounts Receivable Trends
- A steady upward trajectory is observed in gross accounts receivable, which expanded from 542,375 thousand US dollars in 2019 to 1,201,602 thousand US dollars by the end of 2023. This represents more than a twofold increase in the total credit extended to customers over the five-year period.
- Allowance for Doubtful Accounts Volatility
- The allowance for doubtful accounts, sales returns, and cash discounts exhibited non-linear movement. Following a slight decrease to 1,878 thousand US dollars in 2020, the allowance rose sharply to 4,676 thousand US dollars in 2021 and reached a peak of 10,460 thousand US dollars in 2022. In 2023, the allowance decreased to 7,638 thousand US dollars, despite the continued expansion of the gross receivables balance.
- Analysis of the Allowance Ratio
- The allowance as a percentage of gross accounts receivable remained relatively low, peaking at 1.02% in 2022. A significant increase in this ratio is noted between 2020 (0.28%) and 2022, suggesting a period of heightened perceived credit risk or a more conservative estimation approach. The reduction of the ratio to 0.64% in 2023 indicates a moderation in risk exposure or an improvement in the quality of the receivables portfolio.
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