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: 2024-09-30), 10-K (reporting date: 2023-09-30), 10-K (reporting date: 2022-09-30), 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30).
1 2024 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 6,454 ÷ 475,737 = 1.36%
The analysis of credit loss reserves from September 30, 2019, to September 30, 2024, reveals a general upward trend in both the absolute value of the allowance for doubtful accounts and the gross accounts receivable balance.
- Gross Accounts Receivable Trends
- Gross accounts receivable increased from $334.4 million in 2019 to $475.7 million in 2024. Aside from a temporary decrease in 2021, the balance has expanded consistently, reflecting a significant growth in total credit exposure over the observed period.
- Allowance for Doubtful Accounts Growth
- The allowance for doubtful accounts grew from $2.6 million in 2019 to $6.5 million in 2024. A sharp increase was observed between 2019 and 2020, where the reserve nearly doubled. Following a period of relative stability between 2021 and 2022, the allowance rose steadily through 2023 and 2024, reaching its highest point in the final year of the analysis.
- Allowance Ratio Interpretation
- The allowance as a percentage of gross accounts receivable rose from 0.77% in 2019 to 1.36% in 2024. The ratio experienced a significant jump to 1.29% in 2020, followed by a three-year period of stabilization between 1.13% and 1.17% from 2021 to 2023. The increase to 1.36% in 2024 indicates a more conservative valuation of receivables or an increase in the perceived risk of default within the customer portfolio.
The correlation between the rising gross receivables and the increasing allowance percentage suggests that the growth in the company's credit sales is accompanied by an escalating expectation of uncollectible accounts, culminating in the highest credit risk reserve as of September 30, 2024.
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