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 × 44 ÷ 11,663 = 0.38%
Between 2019 and 2023, the management of credit risk as reflected by the allowance for doubtful accounts showed a general upward trend in absolute terms, despite significant fluctuations in the total volume of gross receivables. The overall credit risk profile remains low, with the allowance consistently representing a small fraction of the total receivables balance.
- Allowance for Doubtful Accounts Trends
- The absolute value of the allowance for doubtful accounts grew from 17 million US$ in 2019 to 44 million US$ by the end of 2023. A sharp increase was observed between 2020 and 2021, where the allowance rose from 18 million US$ to 40 million US$. Although a reduction to 29 million US$ occurred in 2022, the balance reached a five-year peak in 2023.
- Gross Receivables Volatility
- Gross receivables exhibited substantial variance over the analyzed period. After a decline to 5,778 million US$ in 2020, balances expanded rapidly, peaking at 13,506 million US$ in 2022. A subsequent contraction to 11,663 million US$ was recorded in 2023, indicating fluctuations in credit extension or collection cycles.
- Allowance as a Percentage of Gross Receivables
- The allowance ratio remained consistently low, never exceeding 0.40%. This ratio climbed from 0.22% in 2019 to 0.36% in 2021, before dropping to a period low of 0.21% in 2022. By 2023, the ratio reached its highest level at 0.38%, suggesting a more conservative valuation of receivables or an increase in the perceived risk of non-collection at the end of the period.
- Correlation Analysis
- A notable divergence is observed in 2022, where gross receivables reached their highest point of 13,506 million US$, yet the allowance for doubtful accounts decreased both in absolute terms and as a percentage of gross receivables. This indicates an improvement in the quality of the receivables portfolio or a shift in the estimation methodology during that fiscal year. Conversely, 2023 saw a decrease in gross receivables coupled with an increase in the allowance ratio, marking a shift toward higher credit loss expectations.
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