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 expected credit losses ÷ Accounts receivable, gross
= 100 × 52,800 ÷ 2,531,200 = 2.09%
An analysis of the credit loss provisions and receivables from 2017 to 2021 reveals fluctuations in both the volume of outstanding receivables and the perceived credit risk associated with those balances.
- Allowance for Expected Credit Losses
- The absolute value of the allowance for expected credit losses demonstrated a volatile trend, starting at $71.5 million in 2017 and concluding at a five-year low of $52.8 million in 2021. A notable increase was observed in 2020, where the allowance rose to $68.4 million, suggesting a temporary increase in the estimation of potential defaults before a significant reduction occurred in the subsequent year.
- Gross Accounts Receivable Patterns
- Gross accounts receivable showed a steady increase between 2017 and 2019, reaching a peak of $2.86 billion. This was followed by a sharp contraction in 2020 to $2.34 billion, representing the lowest balance in the analyzed period. A recovery trend emerged in 2021, with gross receivables increasing to $2.53 billion.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross accounts receivable provides insight into the perceived credit quality of the portfolio. The ratio declined from 2.70% in 2017 to 2.17% in 2019, indicating improving credit stability. However, a peak of 2.92% was reached in 2020, which coincides with the period of lowest gross receivables, suggesting a heightened risk profile per dollar of receivable during that year. By 2021, the ratio dropped to 2.09%, indicating the most favorable credit risk assessment over the five-year duration.
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