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: 2023-08-26), 10-K (reporting date: 2022-08-27), 10-K (reporting date: 2021-08-28), 10-K (reporting date: 2020-08-29), 10-K (reporting date: 2019-08-31), 10-K (reporting date: 2018-08-25).
1 2023 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for credit losses ÷ Accounts receivable, gross
= 100 × 7,700 ÷ 528,085 = 1.46%
An analysis of the credit loss provisions reveals a divergence between the growth of gross accounts receivable and the valuation of the allowance for credit losses over the six-year period ending August 26, 2023. While gross receivables have expanded consistently, the allowance for credit losses peaked in 2021 before entering a period of contraction.
- Gross Accounts Receivable Growth
- A consistent upward trajectory is observed in gross accounts receivable, which grew from US$ 264.2 million in 2018 to US$ 528.1 million in 2023. This represents a substantial increase in the total volume of credit extended to customers, with a particularly sharp acceleration occurring between 2021 and 2022.
- Allowance for Credit Losses Trends
- The absolute value of the allowance for credit losses increased steadily from US$ 6.1 million in 2018 to a peak of US$ 11.4 million in 2021. However, this trend reversed in the subsequent two years, with the allowance declining to US$ 7.7 million by August 2023, despite the continued growth in the gross receivable balance.
- Allowance as a Percentage of Gross Receivables
- The ratio of the allowance to gross accounts receivable reflects a shift in credit risk assessment. The percentage increased from 2.31% in 2018 to a maximum of 2.92% in 2021, suggesting a period of heightened credit risk or more conservative provisioning. Following 2021, the ratio declined sharply to 1.85% in 2022 and further to 1.46% in 2023.
The data indicates a significant improvement in the perceived quality of the receivables portfolio or a shift in the company's credit risk appetite. The simultaneous increase in gross receivables and the decrease in the allowance percentage from 2021 to 2023 suggest that the credit quality of the customer base improved or that recoveries exceeded expectations, leading to a reduced need for loss reserves relative to the total amount outstanding.
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