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), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowances for credit losses ÷ Accounts receivable, gross
= 100 × 6,161 ÷ 1,917,546 = 0.32%
An analysis of the credit loss provisions from 2017 to 2021 reveals a significant divergence between the growth of gross accounts receivable and the reserves maintained for credit losses.
- Allowances for Credit Losses
- The absolute value of allowances for credit losses peaked in 2018 at US$ 17.495 million before entering a period of consistent decline. By December 31, 2021, the allowance decreased to US$ 6.161 million, representing a reduction of approximately 64.8% from its 2018 peak.
- Gross Accounts Receivable Trends
- Gross accounts receivable remained relatively stable between 2017 and 2020, fluctuating within a range of US$ 857 million to US$ 1.06 billion. However, a substantial increase occurred in 2021, with the balance rising to US$ 1.918 billion, which is nearly double the balance reported in 2020.
- Allowance as a Percentage of Gross Receivables
- The ratio of the allowance to gross receivables exhibited stability between 2017 and 2019, oscillating within a narrow band between 1.65% and 1.85%. A sharp contraction is observed starting in 2020, where the ratio fell to 0.84%, followed by a further decline to 0.32% in 2021. This indicates a marked reduction in the proportion of receivables deemed uncollectible despite the surge in total credit exposure.
The combination of rapidly increasing gross receivables and simultaneously decreasing allowances suggests a significant shift in the credit risk profile or a modification in the estimation methodology for credit losses during the 2020 and 2021 fiscal years.
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