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: 2022-12-31), 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).
1 2022 Calculation
Allowance as a percentage of accounts and notes receivable, gross = 100 × Allowance for credit losses ÷ Accounts and notes receivable, gross
= 100 × 43,700 ÷ 2,823,800 = 1.55%
An analysis of the allowance for credit losses relative to gross accounts and notes receivable between 2018 and 2022 reveals a general increase in credit risk provisions despite fluctuations in the total receivable balance.
- Gross Accounts and Notes Receivable Trends
- Gross receivables exhibited volatility over the five-year period. An initial increase was noted from 2018 to 2019, followed by a significant contraction in 2020, where balances dropped to 2,242,100 thousand dollars. A steady recovery followed in 2021 and 2022, with the 2022 balance of 2,823,800 thousand dollars returning to levels comparable to those seen in 2019.
- Allowance for Credit Losses Magnitude
- The absolute value of the allowance for credit losses increased from 32,700 thousand dollars in 2018 to 43,700 thousand dollars by 2022. This represents an overall upward trend in the reserve held for potential defaults, with a notable jump occurring between 2018 and 2019, followed by a period of relative stability before another increase in 2022.
- Credit Loss Ratio Analysis
- The allowance as a percentage of gross receivables rose from 1.21% in 2018 to a peak of 1.78% in 2020. This peak occurred concurrently with the lowest gross receivable balance, indicating a more conservative provisioning approach or a heightened assessment of credit risk during that period. While the ratio declined slightly to 1.55% by 2022, it remained consistently higher than the 2018 baseline, suggesting a permanent shift in the expected loss profile or credit policy.
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