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, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 14,300 ÷ 755,900 = 1.89%
An analysis of the credit risk provisions from 2018 to 2022 reveals a significant upward trend in the allowance for doubtful accounts, indicating an increasingly conservative approach to estimating potential credit losses or a shift in the underlying credit quality of the receivables portfolio.
- Allowance for Doubtful Accounts Trend
- The absolute value of the allowance for doubtful accounts grew from US$ 4.8 million in 2018 to US$ 14.3 million by 2022. This represents an approximate 198% increase over the five-year period. While a slight contraction occurred in 2021, the overall trajectory remains sharply positive, peaking in the final year of the analyzed period.
- Gross Accounts Receivable Dynamics
- Gross accounts receivable exhibited a U-shaped pattern, declining from US$ 730.2 million in 2018 to a low of US$ 647.2 million in 2020, before recovering to US$ 755.9 million in 2022. The fact that the allowance for doubtful accounts increased while gross receivables were declining between 2018 and 2020 suggests a targeted increase in risk provisions during that interval.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross accounts receivable increased from 0.66% in 2018 to 1.89% in 2022. The ratio peaked at 1.93% in 2020, coinciding with the lowest level of gross receivables. This divergence indicates that the growth in the allowance was not merely a function of increased sales volume, but rather a response to higher perceived credit risk or revised accounting estimates for bad debts.
The convergence of rising allowance levels and a recovering receivables balance in 2022 suggests that the company is maintaining a higher baseline for credit loss expectations than was prevalent in 2018.
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