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.
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- Balance Sheet: Assets
- Common-Size Balance Sheet: Assets
- Analysis of Profitability Ratios
- Analysis of Liquidity Ratios
- Common Stock Valuation Ratios
- Enterprise Value to FCFF (EV/FCFF)
- Selected Financial Data since 2005
- Return on Equity (ROE) since 2005
- Return on Assets (ROA) since 2005
- Price to Book Value (P/BV) since 2005
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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 receivable, gross = 100 × Allowance for credit losses ÷ Accounts receivable, gross
= 100 × ÷ =
- Allowance for Credit Losses
- The allowance for credit losses showed a consistent upward trend over the five-year period. Starting at $93 million in 2018, it increased gradually each year, reaching $134 million by the end of 2022. This represents an overall increase of approximately 44%, suggesting that the company has progressively recognized greater potential credit risk or deteriorating credit conditions in its receivables portfolio.
- Accounts Receivable, Gross
- Gross accounts receivable demonstrated variability with a notable dip in 2020 followed by substantial growth in subsequent years. Initially at $1,638 million in 2018 and relatively stable in 2019, it declined to $1,423 million in 2020. However, significant increases occurred in 2021 and 2022, climbing to $1,789 million and $2,138 million respectively. By 2022, gross receivables were approximately 30% higher than in 2018, indicating increased sales or extended credit terms.
- Allowance as a Percentage of Accounts Receivable, Gross
- This ratio fluctuated in a narrow range over the period, starting at 5.68% in 2018 and increasing to a peak of 7.59% in 2020 before declining to 6.27% in 2022. The peak in 2020 corresponds with the year of lowest gross receivables, suggesting a conservative approach to credit loss provisioning during uncertain market conditions. The subsequent decrease indicates a partial easing of credit risk concerns, although the allowance percentage in 2022 remains elevated compared to 2018.
- Overall Insights
- The data points to a dynamic credit environment with increased exposure and risk considerations over time. Rising gross receivables coupled with increasing allowances imply that while business activity expanded, the company maintained vigilant risk management practices. The elevated allowance ratios during 2020 and its adjustment thereafter reflect responsiveness to external factors influencing credit risk. The steady growth in allowances signals a prudent stance toward potential credit losses amidst changing economic conditions.