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Fortinet's Total Equity stayed negative for 2 years in a row, should you be concerned?

Updated: Mar 9

KEYPOINTS:

🔑 Likely due to high amount of Stocks Repurchases (leading to negative Retained Earnings).

🔑 Investors can take this as a good sign that the management is very long in the company's stock.


 

Table of Contents:


Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

 

Fortinet's Shareholders' Equity turned negative (again) in Q4 2023.


  • Fortinet's 2023 Q4 result revealed their Total Equity amount has reached a negative level once again (after returning to positive levels in Q1, Q2, & Q3 in 2023).

    • Read here to learn why negative shareholders' equity could be a redflag for investors.


  • As a result, Fortinet's Shareholders' Equity has been negative for 2 years in a row now.


  • (note): previously, I wrote about what caused Fortinet's Negative Equity amount in Q2 2022 in this article here.


What caused Fortinet's negative Total Equity value?


  •  When taken a closer look at what caused the Negative Equity amount,

    • it is due to the Accumulated Deficit (aka negative Retained Earnings amount)

    • (workings): Shareholders' Equity of -463.4 = (0.8 + 1,416.4 -18.9 - 1,861.7)


What caused Fortinet's Accumulated Deficit (negative Retained Earnings) amount?

  • When looking deeper into what caused the Accumulated Deficit amount

    • it revealed that this is due to their high amount incurred from *Repurchase & retirement of common stock ($1,463.1 mill).



Why were Fortinet's Retained Earnings negative in the past 6 out of 7 years?


  • Looking at Fortinet's Retained earnings in the past few years,

    • we can see that it was negative in 6 out of the past 7 years

  • even though throughout the same duration, the company:

    • was in a Net Cash position all along,

  • and was getting more profitable.



  • Hence, when taking a deeper look into what caused these negative retained earning figures

    • it revealed that it was due to high Repurchase & retirement of common stock amount in these years too.


Answer: Fortinet's Share Repurchase Program


  • Share repurchase program as stated in Annual report for year ending 2023

  • in Feb 2023, Fortinet's management extended the share repurchase program by another 1 year (until 29 Feb 2024).




When zoomed out to yearly view in 2022 & 2023,

there appears to be a clear correlation between their

  • their stock price movement

  • and their Shareholders' Equity value

  • since those two years, their stock price fell as much as 19% from the all-time high levels.



  • and Fortinet had the highest amount of Shares Repurchase figures in the same 2 years too since,



[Conclusion]: Is it still safe to hold Fortinet's stock as a long-term investor?

  • At this point, I deem Fortinet to still be a fundamentally sound company to be maintained in my portfolio.


  • Since, I am still very long in the Cybersecurity Industry as a whole [1]

    • and Fortinet is one of the most fundamentally strong player in the industry.

  • Furthermore, I can deduce that Fortinet's negative stock holders' equity is not due to their

    • increased debt nor

    • incurred losses

      • both of which are redflags investors should be concerned with.


  • On the otherhand, Fortinet's overall Balance sheet is still very strong

    • with close to no gearing (debt) level,

    • healthy & increasing level of total Cash



It is almost always a good sign whenever a company's management is acquiring their shares from the market.


  • It signals a high level of confidence from the management's side on the future prospect of their company's stock.


  • hence for the reasons stated above, Fortinet will maintain as one of the main holdings in my portfolio for the near to long future.



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