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 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × 500 ÷ 1,532,400 = 0.03%
The analysis of the accounts receivable profile from 2017 to 2021 reveals a divergent trend between the growth of gross receivables and the maintenance of the allowance for doubtful accounts. While the asset base expanded significantly, the reserves held against potential credit losses decreased both in absolute terms and as a percentage of the total balance.
- Gross Receivables Expansion
- A consistent upward trajectory is observed in gross receivables, which grew from US$644.9 million in 2017 to US$1.532 billion by 2021. The most pronounced increase occurred between 2020 and 2021, where the balance rose by approximately 73.8%, indicating a substantial expansion in credit sales or a shift in payment terms during the final year of the period.
- Allowance for Doubtful Accounts Volatility
- The allowance for doubtful accounts exhibited significant volatility, peaking at US$3.5 million in 2019 before experiencing a sharp contraction. By 2020, the allowance fell to US$400 thousand, representing a reduction of nearly 88.6% from its 2019 peak. This balance remained low through 2021, ending at US$500 thousand.
- Provisioning Ratio Deterioration
- The allowance as a percentage of gross receivables shows a clear downward trend, particularly after 2019. The ratio declined from 0.43% in 2019 to 0.03% in 2021. This suggests that the company is allocating significantly less capital to cover potential bad debts relative to the size of its receivables portfolio.
- Credit Risk Implications
- The combination of rapidly increasing gross receivables and a diminishing allowance percentage indicates a marked change in the credit risk profile. The negligible ratio of 0.03% in 2021 suggests either a significant improvement in the credit quality of the customer base or a more aggressive approach to bad debt provisioning.
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