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: 2023-01-28), 10-K (reporting date: 2022-01-29), 10-K (reporting date: 2021-01-30), 10-K (reporting date: 2020-02-01), 10-K (reporting date: 2019-02-02), 10-K (reporting date: 2018-02-03).
1 2023 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × 1,076 ÷ 200,498 = 0.54%
An examination of the credit risk profile reveals a significant expansion in gross receivables over the observed period, contrasted by a relatively stable and low allowance for doubtful accounts. The overall trend indicates a strengthening of the receivables position relative to the estimated risk of non-collection.
- Gross Receivables Growth
- A consistent upward trajectory in gross receivables was observed from February 3, 2018, through January 29, 2022, with values increasing from 101,090 thousand USD to a peak of 234,687 thousand USD. A moderate correction occurred by January 28, 2023, where receivables decreased to 200,498 thousand USD.
- Allowance for Doubtful Accounts Volatility
- The absolute value of the allowance for doubtful accounts exhibited fluctuations without a linear trend. The balance reached a peak of 1,371 thousand USD in 2018 and a minimum of 651 thousand USD in 2019. In subsequent years, the allowance remained relatively stable, closing at 1,076 thousand USD in 2023.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross receivables demonstrates a marked reduction in estimated credit risk. From a high of 1.36% in 2018, the ratio declined significantly and stabilized below 1% for the remainder of the period. Despite a temporary increase to 0.97% in 2020, the ratio remained low, ranging between 0.40% and 0.54% from 2021 through 2023.
The divergence between the growth in gross receivables and the stability of the allowance indicates that the company has maintained a low risk of bad debt relative to its increasing volume of outstanding receivables. The consistent ratio below 0.6% in the final three years suggests a disciplined credit management approach or a high quality of the underlying receivable portfolio.
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