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: 2022-12-31), 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).
1 2022 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowance for credit losses ÷ Trade receivables, gross
= 100 × 75 ÷ 3,774 = 1.99%
An analysis of credit risk management between 2018 and 2022 reveals a significant expansion in gross trade receivables accompanied by a corresponding increase in the allowance for credit losses. While the absolute value of the allowance grew substantially over the period, the ratio of the allowance to gross receivables peaked in 2020 before stabilizing.
- Gross Trade Receivables Growth
- Gross trade receivables experienced a sharp increase from 1,489 million US dollars in 2018 to 3,302 million US dollars in 2019, representing more than a doubling of the balance. This upward trajectory continued through 2021, reaching a peak of 3,848 million US dollars, before seeing a slight contraction to 3,774 million US dollars by the end of 2022.
- Allowance for Credit Losses Trend
- The allowance for credit losses rose from 17 million US dollars in 2018 to 82 million US dollars in 2020. Following this peak, the allowance remained relatively stable, ending 2022 at 75 million US dollars. This indicates a period of heightened provisioning that occurred between 2019 and 2020, followed by a plateau in the estimated credit risk.
- Allowance as a Percentage of Gross Receivables
- The percentage of gross receivables allocated to the allowance for credit losses climbed from 1.14% in 2018 to a high of 2.41% in 2020. This suggests a period of increased perceived credit risk or a more conservative provisioning approach during that timeframe. From 2021 onward, the ratio stabilized, remaining nearly constant at approximately 1.98% to 1.99% through the end of 2022.
The correlation between the growth in gross receivables and the increase in the allowance suggests that the expansion of the receivables portfolio was managed with a corresponding increase in risk reserves. The stabilization of the allowance ratio after 2020 indicates that the credit quality of the receivables portfolio has reached a steady state relative to the total volume of outstanding trade balances.
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