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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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 doubtful accounts ÷ Accounts receivable, gross
= 100 × ÷ =
- Allowance for doubtful accounts
- The allowance for doubtful accounts fluctuated over the analyzed period. It decreased from 7,200 thousand USD in 2018 to 5,800 thousand USD in 2019, then returned to 7,200 thousand USD in 2020. Subsequently, it declined again to 5,400 thousand USD in 2021, before rising to 7,300 thousand USD in 2022. This indicates variability in the company’s estimation of uncollectible receivables.
- Accounts receivable, gross
- The gross accounts receivable showed a continuous and substantial increase throughout the period. Starting at 233,900 thousand USD in 2018, it grew steadily each year to reach 292,100 thousand USD in 2019, 435,700 thousand USD in 2020, 519,700 thousand USD in 2021, and ultimately 720,600 thousand USD in 2022. This reflects significant growth in the company's sales or credit extension practices.
- Allowance as a percentage of accounts receivable, gross
- This ratio displayed a consistent downward trend, indicating that the allowance for doubtful accounts became a smaller proportion of the gross accounts receivable over time. It decreased from 3.08% in 2018 to 1.99% in 2019, then to 1.65% in 2020, further declined to 1.04% in 2021, and reached its lowest point of 1.01% in 2022. Such reduction may suggest improved credit quality or more conservative recognition of doubtful receivables relative to the size of receivables.
- Overall analysis
- While gross accounts receivable increased significantly, the allowance for doubtful accounts remained relatively stable in absolute terms and declined markedly as a percentage of receivables. This could imply that despite growing sales or receivables, the company either experienced better credit conditions, improved collection efficiency, or adjusted its credit risk assessment, leading to a lower proportion of anticipated bad debts. The fluctuations in the allowance in absolute terms warrant attention, but the downward trend in percentage terms aligns with positive credit management or improved customer payment behavior.