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: 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 receivables, gross = 100 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × 88 ÷ 2,123 = 4.15%
An analysis of the credit risk profile from 2019 to 2023 reveals a significant expansion in gross receivables accompanied by a disproportionately smaller increase in the allowance for doubtful accounts. While the absolute value of the allowance has grown, the overall credit quality, as measured by the allowance percentage, has improved over the five-year period.
- Gross Receivables Trend
- Gross receivables exhibited a strong upward trajectory, increasing from 1,125 million US$ in 2019 to 2,123 million US$ in 2023. A notable surge occurred between 2020 and 2021, where balances grew by approximately 56.8%. Despite a slight contraction in 2022, the balances reached a five-year peak by the end of 2023.
- Allowance for Doubtful Accounts
- The absolute value of the allowance for doubtful accounts grew from 69 million US$ in 2019 to 88 million US$ in 2023. This growth was non-linear, characterized by a peak in 2021 at 83 million US$, a reduction to 70 million US$ in 2022, and a subsequent rise to the period high of 88 million US$ in 2023.
- Allowance as a Percentage of Gross Receivables
- A consistent downward trend in the allowance ratio is observed from 2019 through 2022, falling from 6.13% to 4.01%. This indicates that the rate of provisioning for bad debts did not keep pace with the growth of the gross receivables portfolio. In 2023, the ratio stabilized with a marginal increase to 4.15%, suggesting a potential shift toward a new baseline in credit loss expectations.
The divergence between the rapid growth of gross receivables and the slower growth of the allowance suggests either an improvement in the quality of the receivables portfolio or a more aggressive approach to credit loss estimation. The reduction of the allowance ratio by approximately 200 basis points between 2019 and 2023 reflects a leaner provisioning strategy relative to the total assets at risk.
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