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Fortinet's Total Equity turned negative for the first time since 14 years, should you be concerned?

Updated: Mar 2

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.

 

Author's note on 29Feb24: Read this article for the more updated version.


Fortinet's Shareholders' Equity turned negative in Q2 2022.


  • 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,



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.


Fortinet's shares outstanding has been declining in the past 5 years, which may benefit existing shareholders (source: ycharts)
Fortinet's shares outstanding has been declining in the past 5 years, which may benefit existing shareholders (source: ycharts)

  • 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.




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