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.
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Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2026-01-25), 10-K (reporting date: 2025-01-26), 10-K (reporting date: 2024-01-28), 10-K (reporting date: 2023-01-29), 10-K (reporting date: 2022-01-30), 10-K (reporting date: 2021-01-31).
1 2026 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × ÷ =
The allowance for doubtful accounts has remained consistently at US$4 million from January 31, 2021, through January 26, 2026. However, a significant trend emerges when considering this allowance in relation to gross accounts receivable.
- Allowance for Doubtful Accounts
- The absolute value of the allowance for doubtful accounts has been static over the observed period. This suggests a consistent policy regarding the estimated uncollectible portion of receivables, or a lack of significant change in the overall risk profile of customers during this time, despite substantial growth in receivables.
Gross accounts receivable have exhibited substantial growth throughout the period. Beginning at US$2,433 million in January 2021, they increased to US$38,470 million by January 2026.
- Allowance as a Percentage of Gross Accounts Receivable
- A marked downward trend is observed in the allowance as a percentage of gross accounts receivable. This percentage decreased from 0.16% in January 2021 to 0.01% in January 2026. This indicates that the allowance is becoming a smaller proportion of the total outstanding receivables. While receivables are growing rapidly, the provision for potential bad debts is not increasing proportionally.
- The decline in this percentage suggests either a decreasing risk of default among customers, improved credit risk assessment processes, or a potentially conservative approach to recognizing potential bad debts relative to the growth in receivables. Further investigation into the company’s credit policies and customer base would be necessary to determine the underlying cause.
The combination of a stable allowance and rapidly growing receivables warrants further scrutiny. While a decreasing percentage may reflect improved credit quality, it also presents a potential risk if the growth in receivables is accompanied by an increase in uncollectible amounts that are not adequately covered by the current allowance.