Is Fortinet (NASDAQ:FTNT) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Fortinet, Inc. (NASDAQ:FTNT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Fortinet

What Is Fortinet's Debt?

The chart below, which you can click on for greater detail, shows that Fortinet had US$993.8m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$3.70b in cash, so it actually has US$2.71b net cash.

How Strong Is Fortinet's Balance Sheet?

We can see from the most recent balance sheet that Fortinet had liabilities of US$3.88b falling due within a year, and liabilities of US$4.06b due beyond that. Offsetting this, it had US$3.70b in cash and US$1.04b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.20b.

Given Fortinet has a humongous market capitalization of US$71.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Fortinet boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Fortinet has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fortinet can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Fortinet may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Fortinet actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Fortinet's liabilities, but we can be reassured by the fact it has has net cash of US$2.71b. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in US$1.7b. So is Fortinet's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Fortinet, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.