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 receivables, gross = 100 × Reserve for credit losses ÷ Receivables, gross
= 100 × 15 ÷ 1,157 = 1.30%
An analysis of the credit loss reserves from 2017 through 2021 reveals a period of relative stability followed by significant volatility centered around the 2020 fiscal year. While the reserve amounts and gross receivables remained consistent for the first three years of the period, a marked shift in risk assessment occurred in 2020, characterized by a simultaneous decrease in total receivables and an increase in the allowance for credit losses.
- Reserve for Credit Losses Trend
- The reserve for credit losses remained stable between 2017 and 2019, fluctuating minimally between 11 and 12 million US$. A sharp increase is observed in 2020, where the reserve doubled to 22 million US$. By 2021, the reserve moderated to 15 million US$, representing a reduction from the 2020 peak but remaining higher than the pre-2020 baseline.
- Gross Receivables Volatility
- Gross receivables showed consistency from 2017 to 2019, averaging approximately 1.11 billion US$. A significant contraction occurred in 2020, with receivables dropping to 769 million US$. This downward trend reversed in 2021, as gross receivables recovered to 1.157 billion US$, the highest level recorded in the five-year period.
- Allowance as a Percentage of Gross Receivables
- The allowance ratio remained low and stable from 2017 to 2019, declining slightly from 1.10% to 0.97%. In 2020, this ratio spiked to 2.86%, indicating a significantly more conservative valuation of receivables or an increased perception of credit risk. In 2021, the ratio normalized to 1.30%, aligning more closely with historical norms while still reflecting a slightly elevated risk profile compared to the 2019 low.
The inverse relationship between gross receivables and the credit loss reserve in 2020 suggests an intentional increase in the allowance during a period of lower receivable balances. This pattern indicates a heightened precautionary approach to credit risk management during that period, which subsequently stabilized as receivable volumes recovered in 2021.
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