Stock Analysis

Fortinet (NASDAQ:FTNT) Could Become A Multi-Bagger

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NasdaqGS:FTNT
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Fortinet's (NASDAQ:FTNT) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Fortinet is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.32 = US$822m ÷ (US$5.3b - US$2.8b) (Based on the trailing twelve months to September 2022).

Therefore, Fortinet has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Software industry average of 10%.

Check out our latest analysis for Fortinet

roce
NasdaqGS:FTNT Return on Capital Employed December 5th 2022

In the above chart we have measured Fortinet's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Fortinet Tell Us?

Investors would be pleased with what's happening at Fortinet. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 32%. The amount of capital employed has increased too, by 73%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 52% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Fortinet's ROCE

In summary, it's great to see that Fortinet can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 539% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Fortinet can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Fortinet (at least 1 which is potentially serious) , and understanding them would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

What are the risks and opportunities for Fortinet?

Fortinet, Inc. provides broad, integrated, and automated cybersecurity solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

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Rewards

  • Trading at 31.2% below our estimate of its fair value

  • Earnings are forecast to grow 16.37% per year

  • Earnings grew by 33.9% over the past year

Risks

  • Negative shareholders equity

  • Has a high level of debt

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