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: 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 × 111 ÷ 7,523 = 1.48%
An examination of the allowance for credit losses reveals a general upward trajectory from 2018 through 2022, despite a period of relative stability between 2019 and 2021. The growth in the provision for doubtful accounts suggests an increase in the estimated risk of non-collection over the five-year period.
- Absolute Allowance for Credit Losses
- The allowance for credit losses increased significantly from 41 million US dollars in 2018 to 86 million US dollars in 2019. Following a marginal decline to 80 million US dollars by 2021, the provision rose to a five-year peak of 111 million US dollars in 2022, indicating a heightened allocation of funds to cover potential defaults.
- Gross Receivables Volume
- Gross receivables experienced a sharp expansion between 2018 and 2019, rising from 4,082 million US dollars to 7,292 million US dollars. The balance remained relatively stable through 2021 before increasing to 7,523 million US dollars in 2022, showing a long-term increase in the volume of outstanding credit extended.
- Credit Risk Ratio
- The allowance as a percentage of gross receivables demonstrated a steady increase, starting at 1.00% in 2018 and reaching 1.48% by 2022. This rising ratio indicates that a larger proportion of total receivables is being flagged as potentially uncollectible, reflecting either a deterioration in the credit quality of the receivables portfolio or a shift toward more conservative loss estimation practices.
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