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 accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 167 ÷ 3,189 = 5.24%
A consistent upward trend is observed in the allowance for doubtful accounts from 2017 through 2021. While gross accounts receivable have generally increased over the same period, the growth of the allowance has significantly outpaced the growth of the underlying receivables, suggesting a more conservative approach to credit loss estimation or a deterioration in the collectability of receivables.
- Growth of Allowance for Doubtful Accounts
- The absolute value of the allowance for doubtful accounts rose from 59 million USD in 2017 to 167 million USD by the end of 2021. This represents a total increase of approximately 183% over the four-year period, with the most substantial year-over-year growth occurring between 2019 and 2020.
- Gross Accounts Receivable Dynamics
- Gross accounts receivable exhibited a general upward trajectory, increasing from 2,257 million USD in 2017 to 3,189 million USD in 2021. A brief contraction was noted in 2020, where balances declined to 2,832 million USD from 2,981 million USD in 2019, before recovering and reaching a period high in 2021.
- Analysis of Allowance as a Percentage of Gross Receivables
- The ratio of the allowance to gross accounts receivable remained relatively stable between 2017 and 2019, moving from 2.61% to 2.95%. However, a significant acceleration is observed starting in 2020, where the percentage jumped to 4.63%, and further increased to 5.24% in 2021. This indicates that the provision for bad debts is increasing at a disproportionate rate compared to the growth of the credit extended to customers.
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