Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Fortinet, Inc. (NASDAQ:FTNT) uses debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Fortinet
What is Fortinet’s net debt?
The graph below, which you can click on for more details, shows that Fortinet had $988.9 million in debt as of March 2022; about the same as the previous year. However, he has $2.14 billion in cash to offset that, which translates to net cash of $1.15 billion.
How strong is Fortinet’s balance sheet?
The latest balance sheet data shows Fortinet had $2.51 billion in liabilities due within the year, and $2.91 billion in liabilities due thereafter. On the other hand, it had a cash position of 2.14 billion dollars and 790.4 million dollars of receivables at less than one year. It therefore has liabilities totaling $2.49 billion more than its cash and short-term receivables, combined.
Given that Fortinet has a colossal market cap of US$47.4 billion, it’s hard to believe that these liabilities pose a big threat. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. Despite its notable liabilities, Fortinet has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!
Also positive, Fortinet has grown its EBIT by 27% over the past year, which should make it easier to pay down debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Fortinet’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Fortinet has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. . Over the past three years, Fortinet has actually produced more free cash flow than EBIT. There’s nothing better than incoming money to stay in the good books of your lenders.
We can understand investors worrying about Fortinet’s liabilities, but we can take comfort in the fact that it has a net cash position of $1.15 billion. The icing on the cake was converting 186% of that EBIT into free cash flow, bringing in US$1.2 billion. So is Fortinet’s debt a risk? This does not seem to us to be the case. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive chart of Fortinet’s earnings per share history for free.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.