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: 2023-12-31), 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).
1 2023 Calculation
Allowance as a percentage of receivables before allowance for credit losses = 100 × Allowance for credit losses ÷ Receivables before allowance for credit losses
= 100 × 28 ÷ 11,066 = 0.25%
The financial data indicates a period of volatility in receivables and credit loss provisions between 2019 and 2023, characterized by a significant spike in credit risk metrics in 2020 followed by a period of stability and relative improvement in credit quality.
- Gross Receivables Trend
- Receivables before allowance experienced a sharp contraction in 2020, falling from 8,094 million US$ to 4,854 million US$. However, this was followed by a robust recovery and consistent growth over the subsequent three years, reaching 11,066 million US$ by December 31, 2023. This upward trajectory suggests an expansion in credit sales or a shift in the timing of collections.
- Allowance for Credit Losses
- The absolute value of the allowance for credit losses peaked in 2020 at 47 million US$, reflecting a heightened anticipation of defaults during that period. From 2021 onward, the allowance stabilized, fluctuating narrowly between 28 million and 30 million US$, indicating a consistent assessment of expected credit losses despite the increasing volume of total receivables.
- Credit Loss Ratio Analysis
- The allowance as a percentage of receivables before allowance shows a marked peak of 0.97% in 2020, which coincided with the lowest point of gross receivables. Since 2021, this ratio has declined significantly and remained low, moving from 0.28% in 2021 and 2022 to 0.25% in 2023. This downward trend demonstrates a reduction in the relative credit risk profile and suggests a high level of confidence in the recoverability of the accounts receivable balance.
Overall, the data reveals that while the volume of receivables has grown substantially since 2020, the proportional allocation for credit losses has decreased, signifying improved credit management or an overall reduction in the perceived risk of bad debts.
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