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), 20-F (reporting date: 2018-12-31), 20-F (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of accounts receivable from third parties = 100 × Allowance for credit loss ÷ Accounts receivable from third parties
= 100 × 2 ÷ 925 = 0.22%
An analysis of the credit loss provisions from 2017 to 2021 reveals a high degree of stability in the absolute allowance for credit losses despite significant fluctuations in the total volume of accounts receivable. The allowance remained constant at 3 million USD during 2017 and 2018, before marginally decreasing to 2 million USD in 2019 and remaining at that level through 2021.
- Accounts Receivable Volatility
- Accounts receivable from third parties exhibited a U-shaped trend over the five-year period. Balances declined from 882 million USD in 2017 to a period low of 669 million USD in 2019, followed by a consistent recovery that culminated in a peak of 925 million USD by December 31, 2021.
- Allowance Ratio Trend
- The allowance for credit loss as a percentage of accounts receivable demonstrates a steady downward trajectory after 2018. From a peak of 0.38% in 2018, the ratio decreased annually to 0.22% by 2021. This represents a contraction in the relative provision for bad debts even as the total receivable balance grew by approximately 38% between 2019 and 2021.
- Credit Quality Interpretation
- The divergence between increasing accounts receivable and a stagnant or decreasing credit loss allowance indicates an improvement in the perceived credit quality of the third-party customer base. The reduction in the allowance percentage suggests that the risk of default is viewed as decreasing relative to the total exposure, or that the company has implemented more effective credit risk management strategies.
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