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 accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 18 ÷ 1,322 = 1.36%
An analysis of the receivables portfolio from 2019 to 2023 reveals a divergent trend between the growth of gross accounts receivable and the maintenance of the allowance for doubtful accounts. While the volume of outstanding receivables has expanded, the provisions for potential credit losses have remained relatively flat or decreased, indicating an improvement in the overall credit quality of the asset base.
- Gross Accounts Receivable Growth
- A consistent upward trend is observed in gross accounts receivable starting from 2020. The balance increased from US$ 1,033 million in 2020 to US$ 1,322 million in 2023. This growth reflects an increase in the total credit extended to customers over the period.
- Stability of Allowance for Doubtful Accounts
- The absolute value of the allowance for doubtful accounts has remained stable, fluctuating within a narrow range between US$ 17 million and US$ 21 million. Despite the significant increase in gross receivables, the allowance did not rise proportionally, ending at US$ 18 million in 2023.
- Allowance Ratio Deterioration and Improvement
- The allowance as a percentage of gross accounts receivable shows a general decline. The ratio peaked at 1.94% in 2020 before trending downward to 1.36% by December 31, 2023. This downward trajectory suggests that a smaller percentage of the total receivables balance is considered at risk of default, pointing to more efficient credit risk management or a higher quality of the customer portfolio.
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