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: 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 receivables, gross = 100 × Allowance for credit losses ÷ Receivables, gross
= 100 × ÷ =
The financial data over the five-year period from 2018 to 2022 reveals notable trends in the allowance for credit losses, gross receivables, and the ratio of the allowance to gross receivables.
- Allowance for credit losses
- The allowance increased substantially from US$41 million in 2018 to US$86 million in 2019, then remained relatively stable around the mid-80s to 80 million range through 2021. However, in 2022, there was a marked increase to US$111 million, representing the highest level recorded in the period.
- Receivables, gross
- Gross receivables demonstrated significant growth from US$4,082 million in 2018 to a peak of US$7,292 million in 2019. Subsequently, gross receivables showed a slight decrease in 2020 and 2021, stabilizing around US$7,064 million before increasing again to US$7,523 million in 2022. The overall trend indicates growth with some fluctuations but no decisive downward trajectory.
- Allowance as a percentage of gross receivables
- This ratio rose steadily from 1.00% in 2018 to 1.18% in 2019, followed by a slight increase to 1.20% in 2020. It then decreased marginally to 1.13% in 2021 but rose notably to 1.48% in 2022. This indicates a growing proportion of credit losses being reserved relative to the gross receivables, particularly in the most recent year.
In summary, the allowance for credit losses shows a general upward trajectory, with its growth outpacing that of gross receivables in the latest year. The increasing allowance percentage suggests a cautious approach to credit risk, possibly reflecting heightened concerns about collectability despite relatively stable receivables levels. The fluctuations across the years indicate variability in credit risk assessment or changes in economic conditions influencing potential losses.