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: 2024-12-31), 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).
1 2024 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for credit losses ÷ Accounts receivable, gross
= 100 × 55 ÷ 4,674 = 1.18%
The analysis of the data indicates several notable trends concerning credit losses and accounts receivable over the five-year period.
- Allowance for Credit Losses
- The allowance for credit losses decreased from 48 million US dollars in 2020 to a low of 31 million in 2022, indicating a period of declining anticipated credit risk. However, it subsequently increased to 38 million in 2023 and further rose to 55 million in 2024, surpassing the initial 2020 level. This suggests a shift toward higher expected credit risk or a more conservative approach in recent years.
- Accounts Receivable, Gross
- There was a consistent upward trend in gross accounts receivable, rising from 2,952 million US dollars in 2020 to 4,674 million in 2024. This represents a significant increase, approximately 58%, over the period, indicating growth in sales or services rendered on credit.
- Allowance as a Percentage of Accounts Receivable, Gross
- This percentage declined markedly from 1.63% in 2020 to a low of 0.75% in 2022, reflecting a reduced relative provision for credit losses compared to the size of receivables. It then increased to 0.84% in 2023 and more sharply to 1.18% in 2024. Despite the recent increase, the allowance percentage remains below the 2020 level, suggesting an overall reduction in relative credit risk or changes in provisioning policy.
In summary, the gross accounts receivable have expanded steadily, suggesting business growth or increased credit sales, while the allowance for credit losses showed an initial decline followed by a recent rise. The allowance as a percentage of gross receivables decreased until 2022 but has increased more recently, which may reflect changes in credit quality, risk assessments, or accounting policies related to credit loss provisioning.