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: 2023-06-30), 10-K (reporting date: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30).
1 2023 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for credit losses ÷ Accounts receivable, gross
= 100 × 16 ÷ 1,468 = 1.09%
The financial data indicates a period of significant volatility in the allowance for credit losses, characterized by a prominent spike in 2020 followed by a general trend toward lower credit risk reserves through 2023.
- Allowance for Credit Losses Trends
- The allowance for credit losses remained relatively stable between 2018 and 2019, moving from US$ 29 million to US$ 32 million. A substantial increase occurred in 2020, where the allowance peaked at US$ 63 million. Following this peak, the allowance decreased sharply to US$ 20 million in 2021 and reached a period low of US$ 10 million in 2022, before slightly increasing to US$ 16 million in 2023.
- Gross Accounts Receivable Fluctuations
- Gross accounts receivable exhibited fluctuating patterns over the six-year period. After an increase to a peak of US$ 1,863 million in 2019, the balance dropped significantly to US$ 1,257 million in 2020. A recovery was observed in 2021 with a rise to US$ 1,722 million, followed by a gradual decline to US$ 1,468 million by June 30, 2023.
- Allowance as a Percentage of Gross Receivables
- The ratio of the allowance to gross accounts receivable provides a metric for the perceived credit risk. This ratio remained under 2% in 2018 and 2019, but surged to 5.01% in 2020, signaling a significant increase in the estimation of uncollectible accounts relative to the total receivable balance. From 2021 onward, this percentage declined sharply, reaching a low of 0.61% in 2022 and stabilizing at 1.09% in 2023, indicating a shift toward more optimistic credit loss expectations or improved collection quality.
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