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 trade receivables, gross = 100 × Allowance for credit losses ÷ Trade receivables, gross
= 100 × 3,202 ÷ 908,348 = 0.35%
The period between 2018 and 2022 is characterized by a substantial expansion in gross trade receivables, which grew from $174.0 million to $908.3 million. While the absolute value of the allowance for credit losses also increased over this timeframe, the rate of growth in the allowance did not scale proportionally with the growth of the total receivables balance.
- Gross Trade Receivables Trend
- A significant acceleration in receivables is observed starting in 2021, with a further surge in 2022. The balance nearly doubled between December 31, 2021, and December 31, 2022, indicating a rapid increase in credit sales or a lengthening of the collection cycle.
- Allowance for Credit Losses Evolution
- The allowance for credit losses increased from $427 thousand in 2018 to a peak of $3.2 million in 2022. A notable spike occurred between 2018 and 2019, where the allowance grew by more than 470%, suggesting a shift in credit risk assessment or a change in accounting estimates during that period.
- Allowance Ratio Analysis
- The allowance as a percentage of gross trade receivables exhibited a non-linear trend, peaking at 1.30% in 2020. Following this peak, the ratio declined to 0.57% in 2021 and further to 0.35% in 2022. This downward trend in the ratio, occurring simultaneously with the massive increase in gross receivables, indicates that the company is allocating a smaller proportion of its receivables to cover potential losses, which may reflect improved credit quality of the customer base or a more aggressive recovery expectation.
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