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 credit losses ÷ Accounts receivable, gross
= 100 × 12,025 ÷ 558,491 = 2.15%
The analysis of credit loss provisions from 2017 to 2021 reveals a general expansion in both the volume of accounts receivable and the corresponding allowances for credit losses, reflecting shifts in credit risk exposure over the five-year period.
- Allowance for Credit Losses Trend
- The absolute value of the allowance for credit losses grew consistently, rising from US$ 4.8 million in 2017 to US$ 12.0 million by 2021. A significant acceleration occurred between 2019 and 2020, during which the allowance nearly doubled, increasing from US$ 6.9 million to US$ 12.0 million.
- Gross Accounts Receivable Growth
- Gross accounts receivable exhibited a strong upward trajectory, increasing from US$ 284.8 million in 2017 to US$ 558.5 million in 2021. The most substantial expansion was observed between 2020 and 2021, where receivables increased by approximately 44%, indicating a significant growth in the company's credit extension.
- Credit Loss Ratio Analysis
- The allowance as a percentage of gross accounts receivable peaked in 2020 at 3.10%, suggesting a period of heightened perceived credit risk or a more conservative provisioning approach. By 2021, this ratio decreased to 2.15%. Because this decrease occurred while gross receivables reached their five-year peak, it indicates a relative improvement in the credit quality of the receivables portfolio or a reduction in the expected loss rate per dollar of credit extended.
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