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: 2022-06-30), 10-K (reporting date: 2021-06-30), 10-K (reporting date: 2020-06-30), 10-K (reporting date: 2019-06-30), 10-K (reporting date: 2018-06-30), 10-K (reporting date: 2017-06-30).
1 2022 Calculation
Allowance as a percentage of trade accounts receivable, gross = 100 × Allowance for credit losses ÷ Trade accounts receivable, gross
= 100 × 9,942 ÷ 2,351,446 = 0.42%
The analysis of the allowance for credit losses from 2017 to 2022 indicates a period of volatility in both the absolute reserves maintained and the underlying gross trade receivables. While gross receivables generally increased over the six-year period, the allowance for credit losses did not follow a linear growth path, suggesting a dynamic adjustment of reserves based on perceived credit risk rather than a fixed percentage of outstanding balances.
- Gross Trade Receivables Trends
- Trade accounts receivable, gross, exhibited an overall upward trajectory, increasing from 1,945,087 thousand US$ in 2017 to 2,351,446 thousand US$ by June 30, 2022. A notable exception occurred in 2020, where balances contracted to 1,866,042 thousand US$, the lowest level in the analyzed period, before rebounding strongly in 2021 and 2022.
- Allowance for Credit Losses Volatility
- The absolute value of the allowance for credit losses fluctuated significantly. After peaking at 14,336 thousand US$ in 2017, the allowance declined for two consecutive years, reaching a low of 8,874 thousand US$ in 2019. A subsequent increase was observed in 2020 and 2021, peaking again at 12,078 thousand US$ before declining to 9,942 thousand US$ in 2022.
- Relative Credit Risk Analysis
- The allowance as a percentage of gross trade receivables remained consistently low, staying below 1% throughout the entire period. The ratio reached its maximum of 0.74% in 2017 and its minimum of 0.41% in 2019. A distinct spike in the risk provision is observable in 2020, where the ratio rose to 0.62% despite a decrease in the gross receivable balance, suggesting a conservative adjustment to credit loss expectations during that fiscal year. By 2022, the ratio compressed to 0.42%, indicating a high level of confidence in the collectability of the expanded receivables portfolio.
AI Ask an analyst for more
Hi, I’m an AI-powered financial analyst at Stock Analysis on Net.
Without a user account, I tend to respond rather slowly.
How can I help you?