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.
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- Income Statement
- Common-Size Income Statement
- Analysis of Liquidity Ratios
- Analysis of Short-term (Operating) Activity Ratios
- DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
- Analysis of Geographic Areas
- Common Stock Valuation Ratios
- Return on Equity (ROE) since 2013
- Return on Assets (ROA) since 2013
- Analysis of Revenues
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Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2023-12-31), 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).
1 2023 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for credit losses ÷ Accounts receivable, gross
= 100 × ÷ =
The data reveals several key trends regarding the allowance for credit losses and accounts receivable over the five-year period from 2019 to 2023.
- Allowance for Credit Losses
- The allowance for credit losses increased significantly from 44 million USD in 2019 to a peak of 132 million USD in 2020. After this peak, the allowance decreased slightly to 126 million USD in 2021 and continued a moderate decline to 117 million USD in 2022. However, in 2023, there was a modest increase back to 131 million USD. This pattern suggests a heightened concern about credit risks during 2020, likely reflecting challenging economic conditions, followed by a gradual easing in subsequent years, with a slight uptick in the most recent period.
- Accounts Receivable, Gross
- Gross accounts receivable experienced a decline from 1,305 million USD in 2019 to 903 million USD in 2020, reflecting a reduction in outstanding receivables during the early pandemic period. Subsequently, it showed a steady increase each year, rising to 1,194 million USD in 2021, 1,444 million USD in 2022, and reaching 1,618 million USD in 2023. This upward trajectory indicates a recovery and expansion in the company’s receivables volume, potentially signaling business growth or extended credit terms.
- Allowance as a Percentage of Accounts Receivable, Gross
- The allowance relative to gross accounts receivable surged from 3.37% in 2019 to a high of 14.62% in 2020. This sharp rise underscores the company’s increased provisioning for potential credit losses amid uncertain economic conditions. Thereafter, the ratio declined steadily to 10.55% in 2021 and further decreased to 8.1% in both 2022 and 2023. Despite the reduction, the allowance percentage remains notably higher than the 2019 level, suggesting a sustained cautious approach to credit risk provisioning even as overall receivables have grown.
Overall, the data indicates a significant response to heightened credit risk concerns in 2020, followed by a cautious normalization in subsequent years. The growth in gross accounts receivable combined with a relatively high allowance percentage may merit continued attention to credit risk management practices going forward.