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 × Provision for doubtful accounts ÷ Accounts receivable, gross
= 100 × 321 ÷ 1,438,352 = 0.02%
The analysis of credit risk management from 2017 to 2021 reveals a period of volatility in gross receivables and a significant shift in the valuation of doubtful accounts toward the end of the period. While bad debt provisions remained relatively stable for the first four years, there was a sharp divergence between the growth of receivables and the recognized allowance in the final year.
- Provision for Doubtful Accounts Trend
- Annual provisions for doubtful accounts fluctuated between $6.2 million and $8.6 million from 2017 through 2020. A substantial contraction occurred in 2021, where the provision dropped to $321 thousand, representing a decline of approximately 95% relative to the previous year.
- Gross Accounts Receivable Volatility
- Gross receivables demonstrated significant instability, peaking twice during the analyzed period. An initial surge occurred in 2018, reaching $1.25 billion, followed by a decline to a low of $572 million in 2020. By December 31, 2021, gross receivables increased sharply to a period high of $1.44 billion.
- Allowance Ratio Interpretation
- Between 2017 and 2020, the allowance as a percentage of gross accounts receivable remained consistent, ranging from 0.69% to 1.16%. However, 2021 showed a critical deviation; despite gross receivables reaching their highest level in five years, the allowance ratio plummeted to 0.02%. This indicates a significant reduction in the estimated credit risk or a fundamental change in the methodology used to determine the allowance for doubtful accounts.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?