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 trade accounts receivable = 100 × Allowance for doubtful accounts ÷ Trade accounts receivable
= 100 × 9,300 ÷ 591,500 = 1.57%
An analysis of the credit risk profile reveals a consistent expansion in trade accounts receivable paired with a relatively stable allowance for doubtful accounts. Between 2017 and 2021, trade accounts receivable increased from 430,100 thousand USD to 591,500 thousand USD, indicating a significant growth in the volume of outstanding credit extended to customers.
- Allowance for Doubtful Accounts Trends
- The absolute value of the allowance for doubtful accounts remained relatively constant over the five-year period, fluctuating within a narrow range between 8,500 thousand USD in 2017 and a peak of 9,600 thousand USD in 2020. The absence of significant volatility suggests a consistent estimation methodology for potential credit losses despite the increase in the total receivables balance.
- Allowance Ratio Analysis
- The allowance as a percentage of trade accounts receivable exhibited a general downward trend, declining from 1.98% in 2017 to 1.57% in 2021. Although a moderate increase to 1.83% was observed in 2020, the overall trajectory indicates that the provision for bad debts has not grown in proportion to the growth of the receivables portfolio.
- Credit Risk Implications
- The divergence between the substantial growth in trade accounts receivable and the relative stagnation of the allowance for doubtful accounts suggests an improvement in the overall quality of the receivables. The reduction of the allowance ratio to its lowest point of 1.57% in 2021 implies either an enhancement in the creditworthiness of the customer base or an increase in the efficiency of credit collection processes.
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