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: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31).
1 2022 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for credit losses ÷ Accounts receivable, gross
= 100 × 50,383 ÷ 1,498,522 = 3.36%
The financial trajectory of credit loss provisions from 2018 to 2022 reveals a transition from a period of relative stability to one of significant increase in perceived credit risk. While the early years of the period showed consistent and low allowance levels, the latter years indicate a sharp escalation in the reserves set aside for doubtful accounts.
- Gross Accounts Receivable Trends
- Gross receivables remained relatively stable between 2018 and 2019 before increasing to 828,527 thousand US dollars in 2020. A substantial expansion occurred in 2021, with balances peaking at 1,730,557 thousand US dollars, followed by a moderate reduction to 1,498,522 thousand US dollars by the end of 2022.
- Allowance for Credit Losses Analysis
- The allowance for credit losses exhibited a slight downward trend from 2018 through 2020, reaching a low of 5,774 thousand US dollars. This pattern shifted abruptly in 2021, with the allowance rising to 21,761 thousand US dollars. The most significant increase occurred in 2022, where the provision more than doubled to 50,383 thousand US dollars.
- Allowance as a Percentage of Gross Receivables
- The ratio of allowance to gross receivables remained under 1% from 2018 to 2020, hitting a period low of 0.70% in 2020. An upward trend emerged in 2021 as the ratio rose to 1.26%. By December 31, 2022, the ratio increased sharply to 3.36%, marking the highest level of credit loss anticipation in the analyzed timeframe.
The divergence observed in 2022 is particularly notable; while the gross accounts receivable balance decreased, the allowance for credit losses increased substantially. This inverse relationship suggests a significant shift in credit risk assessment and a more conservative approach to the valuation of the receivables portfolio.
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