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: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).
1 2024 Calculation
Allowance as a percentage of Accounts receivable, gross = 100 × Allowance for credit losses ÷ Accounts receivable, gross
= 100 × 407 ÷ 36,876 = 1.10%
An analysis of the credit loss reserves reveals a divergent trend between the growth of gross receivables and the allocation of allowances for credit losses over the five-year period ending December 31, 2024. While the volume of outstanding receivables expanded significantly, the reserve levels remained relatively stagnant before experiencing a sharp increase in the final year.
- Gross Accounts Receivable Expansion
- A consistent and substantial upward trajectory is observed in gross accounts receivable, which rose from 22,100 million USD in 2020 to 36,876 million USD by 2024. This represents a total increase of approximately 67% over the period, with the most pronounced growth occurring between 2022 and 2023.
- Allowance for Credit Losses Volatility
- The absolute value of the allowance for credit losses exhibited a non-linear trend. After a period of gradual decline from 358 million USD in 2020 to a low of 333 million USD in 2022, the reserve began to climb, reaching a peak of 407 million USD in 2024. This late-period increase suggests a shift in the assessment of credit risk or a change in the expected loss methodology.
- Credit Loss Ratio Analysis
- The allowance as a percentage of gross accounts receivable showed a steady decline from 1.62% in 2020 to a minimum of 0.96% in 2023. This contraction indicates that for three consecutive years, the growth in gross receivables far outpaced the growth in credit loss reserves, implying either an improvement in the quality of the receivables portfolio or a reduction in the conservatism of the loss estimates. However, this trend reversed in 2024, as the ratio climbed back to 1.10%, aligning with the spike in the absolute allowance value.
In summary, the period was characterized by aggressive growth in gross receivables accompanied by a diminishing reserve ratio until 2023. The subsequent increase in both the absolute allowance and the percentage ratio in 2024 suggests an anticipated rise in credit defaults or a strategic adjustment to bolster the balance sheet against potential losses.
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