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: 2023-03-31), 10-K (reporting date: 2022-03-31), 10-K (reporting date: 2021-03-31), 10-K (reporting date: 2020-03-31), 10-K (reporting date: 2019-03-31), 10-K (reporting date: 2018-03-31).
1 2023 Calculation
Allowance as a percentage of trade accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Trade accounts receivable, gross
= 100 × 10,576 ÷ 312,087 = 3.39%
An analysis of credit risk management from fiscal year 2018 through 2023 reveals a consistent expansion in both the volume of trade receivables and the corresponding reserves held for potential credit losses. While absolute values for both metrics increased over the six-year period, the ratio of the allowance to gross receivables exhibited significant volatility, suggesting periodic adjustments in the assessment of credit risk.
- Trade Accounts Receivable Growth
- Gross trade accounts receivable experienced substantial growth, increasing from 147,191 thousand US dollars in March 2018 to 312,087 thousand US dollars by March 2023. This represents a total increase of approximately 112%, indicating a significant expansion in credit sales or a change in payment terms offered to customers.
- Allowance for Doubtful Accounts Trends
- The allowance for doubtful accounts followed a similar upward trajectory, rising from 3,487 thousand US dollars in 2018 to 10,576 thousand US dollars in 2023. The most rapid absolute growth in the allowance occurred between 2020 and 2021, where the reserve increased by nearly 3 thousand US dollars in a single fiscal year.
- Credit Risk Ratio Volatility
- The allowance as a percentage of gross trade accounts receivable showed a steady climb from 2.37% in 2018 to a peak of 4.32% in March 2021. This upward trend suggests a period of increasing conservatism or an escalation in the perceived risk of default. However, a sharp correction occurred in March 2022, where the ratio fell to 2.90% despite a significant increase in gross receivables. By March 2023, the ratio moderated slightly upward to 3.39%, indicating a stabilization of credit risk expectations following the 2021 peak.
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