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 × 15,278 ÷ 1,232,682 = 1.24%
The financial data indicates a period of consistent growth in gross accounts receivable coupled with significant volatility in the valuation of the allowance for doubtful accounts between 2017 and 2021.
- Gross Accounts Receivable Trend
- A continuous upward trajectory is observed in gross accounts receivable, which grew from 669,698 thousand US dollars in 2017 to 1,232,682 thousand US dollars by the end of 2021. This represents a steady increase in the total amount of credit extended to customers over the five-year period.
- Allowance for Doubtful Accounts Volatility
- The allowance for doubtful accounts experienced a decline from 2017 through 2019, reaching a low of 2,401 thousand US dollars. However, a sharp reversal occurred in 2020, where the allowance spiked to 16,946 thousand US dollars, before slightly moderating to 15,278 thousand US dollars in 2021. This suggests a substantial increase in the estimated credit risk associated with the receivables portfolio starting in 2020.
- Allowance as a Percentage of Gross Receivables
- The ratio of the allowance to gross receivables followed a similar volatile pattern. The percentage decreased from 0.81% in 2017 to a minimum of 0.28% in 2019. In 2020, this ratio increased significantly to 1.60%, indicating a more conservative approach to bad debt estimation or an actual deterioration in the credit quality of the receivables. By 2021, the ratio settled at 1.24%, remaining considerably higher than the levels maintained between 2017 and 2019.
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