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: 2022-01-29), 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), 10-K (reporting date: 2017-01-28).
1 2022 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowances for uncollectible receivables ÷ Receivables, gross
= 100 × 39 ÷ 1,081 = 3.61%
The analysis of bad debt provisions between January 2017 and January 2022 reveals a non-linear trend in credit risk management, characterized by an initial period of decreasing allowances followed by a notable increase in both absolute and relative terms.
- Gross Receivables Performance
- A general contraction in gross receivables is observed over the analyzed period. The balance decreased from a peak of 1,399 million USD in 2017 to 1,081 million USD by 2022. Although a temporary increase to 1,173 million USD occurred in 2020, the overall trajectory indicates a reduction in the total volume of outstanding receivables.
- Allowances for Uncollectible Receivables
- The absolute value of the allowance for uncollectible receivables experienced a significant decline from 52 million USD in 2017 to a low of 23 million USD in 2019. Subsequently, this figure rose steadily, reaching 39 million USD by 2022, suggesting an increase in the estimated credit risk associated with the receivables portfolio in the latter years of the period.
- Allowance as a Percentage of Gross Receivables
- The allowance ratio exhibits a V-shaped trend. After starting at 3.72% in 2017, the ratio declined consistently to a minimum of 2.05% in 2020. However, a sharp reversal occurred in 2021 and 2022, with the ratio climbing back to 3.61%. This indicates that by 2022, the provision for doubtful accounts had returned to levels nearly identical to those seen in 2017, despite a lower overall volume of gross receivables.
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