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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Caterpillar Inc. pages available for free this week:
- Balance Sheet: Assets
- Common-Size Income Statement
- Common-Size Balance Sheet: Assets
- Analysis of Liquidity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Selected Financial Data since 2005
- Total Asset Turnover since 2005
- Price to Operating Profit (P/OP) since 2005
- Price to Sales (P/S) since 2005
- Analysis of Debt
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Allowance for Credit Losses
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 finance receivables, gross = 100 × Allowance for credit losses ÷ Finance receivables, gross
= 100 × ÷ =
The analysis of the provided financial data reveals several notable trends over the five-year period ending in 2024.
- Allowance for credit losses
- The allowance for credit losses shows a consistent downward trend from 475 million US dollars in 2020 to 262 million US dollars in 2024. This indicates a reduction in the estimated potential losses from uncollected receivables.
- Finance receivables, gross
- The gross finance receivables remain relatively stable over the period, with a slight decrease from 22,160 million US dollars in 2020 to 21,357 million in 2022, followed by an increase to 23,029 million in 2024. This suggests fluctuations in the volume of financed sales or credit extended by the company, but overall maintaining a close range around the low 22,000 million mark.
- Allowance as a percentage of finance receivables, gross
- This ratio displays a clear declining trend from 2.14% in 2020 to 1.14% in 2024. The reduction indicates improved credit risk management or a reduction in expected credit losses relative to the receivables.
In summary, the company appears to be managing credit risk more effectively over the period, as reflected by the declining allowance for credit losses both in absolute terms and as a percentage of gross finance receivables. Meanwhile, the stability of the gross receivables suggests that the credit exposure is being maintained, while risk provisions are being reduced.