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: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30).
1 2022 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowances for returns and credit losses ÷ Accounts receivable, gross
= 100 × 1,626,729 ÷ 20,079,404 = 8.10%
Between September 30, 2017, and September 30, 2022, a consistent expansion in both gross accounts receivable and the associated allowances for returns and credit losses was observed. While both absolute values increased over the six-year period, the relationship between them exhibited volatility, indicating shifts in credit risk estimation or return projections relative to the growth of the receivables portfolio.
- Gross Accounts Receivable Trends
- Gross accounts receivable grew from approximately 11.35 billion US dollars in 2017 to 20.08 billion US dollars in 2022. A significant acceleration in growth occurred between 2020 and 2021, during which receivables increased by approximately 4.26 billion US dollars, representing the largest single-year increase in the analyzed period and reflecting a substantial expansion in total credit exposure.
- Allowances for Returns and Credit Losses
- The total allowance for returns and credit losses followed a general upward trajectory, rising from 1.05 billion US dollars in 2017 to a peak of 1.63 billion US dollars in 2022. Minor contractions were noted in 2018 and 2021, but the overall trend suggests an increase in the total capital set aside to cover potential defaults and product returns as the scale of operations increased.
- Allowance Ratio Analysis
- The allowance as a percentage of gross accounts receivable fluctuated, ranging from a high of 9.29% in 2020 to a low of 6.95% in 2021. From 2017 to 2020, the ratio remained relatively stable, oscillating between 8.39% and 9.29%. The sharp decline to 6.95% in 2021 coincided with the rapid surge in gross receivables, indicating that the growth of the receivables balance significantly outpaced the growth of the allowance provision. By 2022, the ratio rose back to 8.10%, suggesting a recalibration of the allowance to better align with the increased gross exposure.
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