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: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
1 2021 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for uncollectible accounts ÷ Accounts receivable, gross
= 100 × 50 ÷ 2,454 = 2.04%
Between 2017 and 2021, the management of uncollectible accounts exhibited a period of stability followed by significant volatility. From 2017 through 2019, the allowance for doubtful accounts and the corresponding risk ratios remained consistently low. This stability was disrupted in 2020, where a sharp divergence occurred between the volume of gross receivables and the allowance for uncollectible accounts. While 2021 showed a trend toward normalization, the risk metrics remained elevated compared to the pre-2020 baseline.
- Allowance for Uncollectible Accounts Trend
- The allowance remained virtually stagnant at $12 million to $13 million from 2017 to 2019. A substantial increase occurred in 2020, with the allowance peaking at $89 million, an increase of approximately 585% over the previous year. By 2021, the allowance decreased to $50 million, representing a partial reduction in the provision for credit losses.
- Gross Accounts Receivable Dynamics
- Gross receivables fluctuated between $2,326 million and $2,867 million from 2017 to 2019. A significant contraction was observed in 2020, with the balance falling to $1,485 million. In 2021, the balance recovered to $2,454 million, returning to levels comparable to the 2017-2018 period.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross accounts receivable remained below 0.60% from 2017 to 2019, indicating a high historical collectability rate. In 2020, this ratio surged to 5.99%, reflecting a dramatic increase in the estimated credit risk relative to the total outstanding receivables. Although the ratio declined to 2.04% in 2021, it remained significantly higher than the 0.45% to 0.52% range observed prior to 2020, suggesting a more conservative approach to credit loss estimation in the recovery phase.
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