IT security company Fortinet (NASDAQ:FTNT) has delivered strong results recently, and despite recent falls, the stock is still up nearly 12% this year. However, headline numbers do not always tell the full story and Fools should look closely at changes in its cash flow generation in order to better judge the company. Is it maturing into the kind of cash cow that rival Check Point Software (NASDAQ:CHKP) is, or is it moving in the other direction?

Fortinet's disappearing free-cash flow
As a company matures it typically sees its revenue growth slow, and a company like Check Point Software is a good example of this. Check Point Software's revenue growth has slowed to single-digits, but over the last five years it has converted an average of around 59% of its revenue into free-cash flow.

Fortinet's mid-teens revenue growth tells investors that the business is less mature than Check Point, but the real question is how is Fortinet's free-cash flow conversion developing?

Unfortunately, investors received some bad underlying news on this issue in 2013. Simply put, a combination of weaker than expected revenue growth, and more importantly, the need to carry more inventory managed to eat into its cash flow conversion. Indeed, a table of its revenue and free-cash flow guidance over the year reveals what happened.

  At Q4 2012 At Q1 2013 At Q2 2013 At Q3 2013 Actual 2014
Revenue $625m-$635m $595m-$605m $595m-$605m $600-$605m $615m
Free Cash Flow $180m-$190m $140m-$150m $130m-$135m $125m-$135m $134m

Source: Fortinet Presentations

While the reduction of $15million from the mid-point of the initial revenue guidance is not such a big deal, free-cash flow generation came in some 28% lower than initial guidance. Investors thinking that the best judge of a company's value is its ability to generate cash, then this number might be cause for concern.

How Fortinet's cash flow generation changed
Check Point is a great example of a business that has managed to leverage revenue growth into free-cash flow generation, but the change in Fortinet's inventory and capital expenditure requirements means that Fools should look at the company differently. The following graph indicates how things have changed.

Note how 2013 saw Fortinet needing to carry relatively more inventory and working capital, which meant that free-cash flow conversion fell noticeably.

Source: Fortinet Presentations

Moreover, the issue of having to carry more inventory appears to be lasting. For example, in previous years its inventory turn (a measure of how many times its inventory gets sold in a period, where a high number is good) used to be around four, but in its recent conference call, management stated that "our goal to manage inventory turns at two or better on an annualized basis".

The shift in inventory turns meant that Fortinet's inventory requirement increased $35 million in 2013, when its revenue only increased by $81.7 million. Hopefully, this sort of shift will prove a onetime occurrence and its inventory requirements will grow at a rate commensurate with its revenue growth in future.

Valuing Fortinet
Fortinet's management hasn't given free-cash flow guidance for 2014, but did comment that capital expenditure requirements would increase by $15 million this year. This is a significant figure when compared to last year's free-cash flow generation of $133.5 million.

Playing around with some valuation scenarios for Fortinet reveals some positive results. For example, if the company converts revenue into operating cash flow at the rate it did last year of 24%, and capital expenditures come in at around $29 million, then free-cash flow could come in at around $140 million for 2014.

If cash flow grows in line with analyst estimates for income growth in 2015, then free-cash flow could come in around $170 million in 2015. These figures represent around 4.8% and 5.9% of its current enterprise value. That's pretty good for a business set to grow revenue in the mid-teens over the next few years. 

The bottom line
All told, despite the adjustments made to its working capital and capital expenditure requirement, Fortinet is looking like an attractive proposition on a risk/reward basis. Check Point Software is definitely the low-growth/high-cash flow value proposition in the sector. However, if Fortinet hits it earnings targets, and free-cash flow conversion stays at around 20% of revenue, then the stock looks a good value.