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: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31), 10-K (reporting date: 2018-10-31).
1 2023 Calculation
Allowance as a percentage of accounts receivable, gross = 100 × Allowance for doubtful accounts ÷ Accounts receivable, gross
= 100 × 37 ÷ 3,518 = 1.05%
The analysis of bad debt provisions reveals a fluctuating trend in both absolute dollar amounts and the relative percentage of gross accounts receivable over the six-year period from 2018 to 2023.
- Allowance for Doubtful Accounts Trends
- The absolute value of the allowance experienced a peak of US$ 46 million in 2020, followed by a sharp decline to a period low of US$ 23 million in 2021. By 2023, the allowance increased again to US$ 37 million, indicating a cyclical pattern in credit risk assessment and provision levels.
- Gross Accounts Receivable Volatility
- Gross receivables showed a general upward trajectory from 2019, peaking at US$ 4,126 million in 2022 before contracting to US$ 3,518 million in 2023. The growth in receivables between 2020 and 2022 occurred while the absolute allowance for doubtful accounts was decreasing, suggesting a period of improved credit quality or a shift in estimation methodology.
- Allowance as a Percentage of Gross Receivables
- The ratio fluctuated between a high of 1.34% in 2020 and a low of 0.57% in 2021. The significant compression of this ratio during 2021 and 2022 suggests a reduction in the expected loss rate relative to the total credit exposure. However, the increase to 1.05% in 2023 indicates a return to risk levels similar to those observed between 2018 and 2019.
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Allowance for Credit Losses
Based on: 10-K (reporting date: 2023-10-31), 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31), 10-K (reporting date: 2018-10-31).
1 2023 Calculation
Allowance as a percentage of financing receivables, gross = 100 × Allowance for credit losses ÷ Financing receivables, gross
= 100 × 243 ÷ 8,814 = 2.76%
An analysis of the credit loss provisions from 2018 to 2023 reveals a period of escalating risk anticipation that peaked in 2022, followed by a moderate correction in 2023. While the gross volume of financing receivables remained relatively stable, the allowance for credit losses experienced significant volatility, indicating changes in the perceived credit quality of the receivables portfolio.
- Allowance for Credit Losses Trend
- The absolute value of the allowance for credit losses exhibited a consistent upward trajectory between 2018 and 2022, rising from 120 million US dollars to a peak of 325 million US dollars. This represents a growth of approximately 171% over four years. However, this trend reversed in 2023, with the allowance decreasing to 243 million US dollars, suggesting a reduction in expected credit losses or a recovery in the credit profile of the customer base.
- Financing Receivables Exposure
- Gross financing receivables fluctuated within a range of 8.26 billion to 9.20 billion US dollars throughout the analyzed period. The exposure peaked in 2021 at 9.198 billion US dollars before dipping in 2022 and recovering slightly to 8.814 billion US dollars by October 31, 2023. The relative stability of the gross receivables suggests that the changes in the allowance were driven by risk assessment factors rather than massive shifts in the volume of financing provided.
- Credit Risk Ratio Analysis
- The allowance as a percentage of gross financing receivables provides a clear metric of credit risk perception. The ratio increased steadily from 1.45% in 2018 to 1.70% in 2020, accelerating sharply to 2.48% in 2021 and reaching a maximum of 3.89% in 2022. This progression indicates a heightened expectation of defaults during this period. The subsequent decline to 2.76% in 2023 marks a significant pivot, reflecting a lower projected loss rate relative to the total outstanding receivables.
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