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.
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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 × ÷ =
- Allowances for Uncollectible Receivables
- The allowance for uncollectible receivables decreased steadily from 52 million US dollars in early 2017 to 23 million in early 2019, reflecting a significant reduction in the estimated bad debts. However, this trend reversed slightly after 2019, with the allowance increasing to 38 million by early 2021 and stabilizing around 39 million in early 2022.
- Gross Receivables
- Gross receivables showed a declining trend from 1,399 million US dollars in early 2017 to 1,038 million in early 2019, indicating a contraction in receivables outstanding. A rebound occurred in 2020, with gross receivables increasing to 1,173 million, before declining again slightly in the subsequent years to 1,081 million by early 2022.
- Allowance as a Percentage of Gross Receivables
- The allowance relative to gross receivables followed a declining trend from 3.72% in early 2017 to a low of 2.05% in early 2020, suggesting improved credit quality or more conservative allowance estimates in the middle periods. However, this percentage rose again to 3.46% in early 2021 and edged up slightly to 3.61% by early 2022, indicating an increased provision in relation to the size of receivables.
- Overall Analysis
- The data reveals initial improvements in credit risk management with reductions in both the allowance for uncollectible receivables and its percentage of gross receivables until around 2019-2020. The concurrent decline and then partial recovery in gross receivables suggest some fluctuations in sales or credit policies. The increase in allowance amounts and their percentage after 2020 may reflect a more cautious approach likely in response to changing economic conditions or increased credit risk during that period.