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 accounts receivable, trade, gross = 100 × Allowances for doubtful accounts, anticipated discounts and write-offs of uncollectible accounts receivable ÷ Accounts receivable, trade, gross
= 100 × 26,001 ÷ 737,204 = 3.53%
An analysis of the credit risk management and accounts receivable trends from 2018 to 2022 reveals a general increase in gross credit exposure coupled with a fluctuating but ultimately decreasing allowance ratio. While gross receivables grew steadily over the five-year period, the provision for doubtful accounts did not scale proportionally, resulting in a lower coverage percentage by the end of the period.
- Gross Accounts Receivable Trend
- A consistent upward trajectory is observed in gross trade receivables starting from 2019. After a slight contraction in 2019 to 593,475 thousand dollars, the balance grew steadily each year, reaching 737,204 thousand dollars by December 31, 2022. This represents a total increase of approximately 19% from 2018 levels, suggesting an expansion in credit sales or a shift in payment terms.
- Allowance for Doubtful Accounts Absolute Values
- The allowance for doubtful accounts, anticipated discounts, and write-offs remained relatively stable between 2018 and 2020, hovering around 24.6 to 25 million dollars. A notable spike occurred in 2021, where the allowance rose to 28,837 thousand dollars. However, this was followed by a reduction to 26,001 thousand dollars in 2022, despite the continued increase in gross receivables.
- Allowance as a Percentage of Gross Receivables
- The ratio of allowance to gross receivables fluctuated within a range of 3.53% to 4.21%. The peak ratio was reached in 2019 at 4.21%, while the lowest point occurred in 2022 at 3.53%. The divergence observed in 2022—where gross receivables reached a five-year high while the allowance ratio dropped to a five-year low—indicates a significant improvement in the perceived collectability of receivables or a reduction in the expected loss rate during that fiscal year.
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