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: 2024-06-29), 10-K (reporting date: 2023-07-01), 10-K (reporting date: 2022-07-02), 10-K (reporting date: 2021-07-03), 10-K (reporting date: 2020-06-27), 10-K (reporting date: 2019-06-29).
1 2024 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 exhibited significant volatility over the analyzed period. Starting at a relatively low value of 28 million USD in mid-2019, it sharply increased to 335 million USD by mid-2020. Subsequently, the allowance declined consistently in the following years to 118 million USD in 2021 and further down to 71 million USD in 2022. The downward trend continued with values of 46 million USD in 2023 before a slight uptick to 54 million USD in mid-2024.
- Accounts Receivable, Gross
- The gross accounts receivable demonstrated overall growth during the period. Initially, it decreased from 4,210 million USD in mid-2019 to 3,228 million USD in mid-2020. Following this decline, there was a steady increase year-over-year: to 3,899 million USD in 2021, 4,910 million USD in 2022, 5,138 million USD in 2023, and reaching 5,378 million USD by mid-2024.
- Allowance as a Percentage of Gross Accounts Receivable
- This ratio reflects the relative level of credit risk expected in the receivables. It peaked markedly at 10.37% in mid-2020, a substantial increase from 0.67% in mid-2019, likely indicating heightened credit risk concerns during that period. After this peak, the ratio steadily declined to 3.02% in 2021, continued down to 1.44% in 2022, and further diminished to below 1% for 2023 and mid-2024, with values of 0.89% and 1.00% respectively. These trends suggest improving credit quality or more conservative recognition of expected credit losses subsequent to the 2020 peak.
- Summary
- Overall, the data show an initial spike in both allowance for credit losses and its relative size to gross receivables in 2020. This may reflect increased credit risk during that period, possibly linked to external economic conditions. Following this, both the absolute allowance and the allowance percentage declined consistently, indicating improving credit conditions or adjustments in risk assessment practices. Simultaneously, gross accounts receivable growth resumed after an initial dip in 2020, supporting the conclusion of recovering business activity and stabilization in credit risk thereafter.