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 accounts receivable, gross = 100 × Allowance for doubtful accounts and sales allowances ÷ Accounts receivable, gross
= 100 × 16,600 ÷ 741,100 = 2.24%
The financial data indicates a fluctuating trend in both gross accounts receivable and the associated allowance for doubtful accounts over the five-year period from 2018 to 2022. A notable peak in both metrics occurred in 2020, followed by a consistent contraction through 2022.
- Gross Accounts Receivable Trends
- Gross receivables experienced steady growth between 2018 and 2020, rising from US$ 723.9 million to a peak of US$ 892.1 million. Following this peak, the balance declined over the subsequent two years, ending at US$ 741.1 million on December 31, 2022. This suggests a contraction in the total volume of outstanding credit extended to customers toward the end of the period.
- Allowance for Doubtful Accounts Volatility
- The allowance for doubtful accounts and sales allowances exhibited significant variability. After a slight decrease in 2019, the allowance spiked to US$ 29.1 million in 2020. This was followed by a sharp and consistent decline, reaching a period low of US$ 16.6 million by 2022. The substantial reduction in the allowance account suggests a decrease in the projected credit risk associated with the receivables portfolio.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross accounts receivable peaked at 3.26% in 2020, mirroring the increase in the absolute allowance value. Since 2020, this ratio has trended downward, falling to 2.24% by the end of 2022. The decrease in this percentage, combined with the reduction in gross receivables, indicates an improvement in the overall quality of the receivables and a lower expected rate of default.
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