Fortinet's Total Equity turned negative for the first time since 14 years, should you be concerned?
KEYPOINTS:
🔑 Likely due to high amount of *stocks repurchase (causing a negative *retained earnings).
🔑 Investors can take this as a good sign that the management is very long in the company's stock.
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.
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[Case]
Fortinet's 2022 Q2 result revealed their Total Equity amount has reached a negative level
for the first time since 14 years.
Read here to learn why negative shareholders' equity could be a redflag for investors,
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)
What caused Fortinet's negative Retained Earnings amount?
When looking deeper into what caused the negative *Retained Earnings amount
it revealed that this is due to their high amount incurred from *Repurchase & retirement of common stock ($1,451.6 mill).
Why were Fortinet's Retained Earnings negative in the past 4 out of 5 years?
Looking back at Fortinet's Retained earnings in the past few years,
we can see that it was negative in 4 out of the past 5 years
even though the company:
was in a 0 net debt position
and was profitable in all these years.
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 2021
in Oct 2021, Fortinet's management extended the share repurchase program by another 1.4 years (up to 28Feb23)
this decision to extend is influenced by the market correction that took place towards end of 2021
making it more attractive to buy their own stock when the prices were lower.
Stock Repurchases amount is on an upward trend
particularly huge spike in:
Q4 21
Q1 22
Q2 22
other source:
https://www.macrotrends.net/stocks/charts/FTNT/fortinet/cash-flow-statement
[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 Fortinet's negative stock holders' equity is not due to their
increased debt nor
incurred losses
of which both 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 level of total Cash
and their:
profitability has been increasing steadily, with
healthy level of Cashflow also.
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.
However, I will be increasing my caution while deploying more funds into the stock when dollar-cost-averaging into my portfolio,
and wait for the subsequent audited financial statements to confirm my hypothesis above.
Source:
