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: 2023-12-31), 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).
1 2023 Calculation
Allowance as a percentage of accounts and notes receivable, gross = 100 × Allowance for doubtful account ÷ Accounts and notes receivable, gross
= 100 × 75 ÷ 5,658 = 1.33%
An analysis of the credit risk profile from 2019 to 2023 reveals a general upward trend in both the gross volume of receivables and the corresponding provisions for doubtful accounts. While gross receivables have grown consistently over the five-year period, the allowance for doubtful accounts has exhibited more volatility, suggesting periodic adjustments in response to perceived credit risks.
- Gross Accounts and Notes Receivable Trends
- A consistent expansion of the gross receivables portfolio is observed, growing from 3,689 million US$ in 2019 to 5,658 million US$ in 2023. The most significant acceleration occurred between 2021 and 2022, where the balance increased by approximately 31.2%, indicating a substantial expansion in credit sales or a shift in payment terms during that period.
- Allowance for Doubtful Accounts Movements
- The allowance for doubtful accounts grew from 19 million US$ in 2019 to 75 million US$ in 2023. A sharp increase was noted in 2020 and a more pronounced surge in 2022, where the allowance reached a peak of 78 million US$. The fluctuations in these figures suggest a reactive provisioning strategy that aligns with specific economic cycles or changes in the credit quality of the customer base.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross receivables provides a normalized view of credit risk. The ratio increased from 0.52% in 2019 to a peak of 1.48% in 2022, before moderating slightly to 1.33% in 2023. The doubling of this ratio between 2019 and 2020, and its subsequent peak in 2022, indicates a heightened anticipation of credit losses during those intervals. Despite this increase, the overall percentage remains relatively low, suggesting that the majority of the receivables portfolio is considered high-quality.
The correlation between the rise in gross receivables and the increase in the allowance suggests that the growth in the credit portfolio has been accompanied by a commensurate increase in risk exposure. However, the stabilization of the percentage ratio in 2023 indicates a potential leveling off of credit risk intensification.
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