The Most Common Mistake in Financial Reporting — Even NVDA Made It
Numbers can be confusing, and people can get the wrong financial data because of it. When looking at percentage gains, people (even large companies like Nvidia) often make this one simple mistake: people will see a, let’s say, 300% gain and think it’s a 3x gain. However, a 300% gain is a 4x gain, and a 400% gain is a 5x gain, the same way a 100% gain is a 2x gain because 1 + 1 = 2, etc. So, let’s dive into the issues with this and how NVDA understated its Q3 earnings growth in its press release. We’ll also talk about how to properly calculate the figures.
Nvidia Made This Mistake, Understating Its Earnings Growth
In November, NVDA wrote this in its Q3 earnings report: “GAAP earnings per diluted share for the quarter were $3.71, up more than 12x from a year ago and up 50% from the previous quarter. Non-GAAP earnings per diluted share were $4.02, up nearly 6x from a year ago and up 49% from the previous quarter.”
However, this was understated. Nvidia’s Q3 GAAP earnings per share actually grew by more than 13x, and its non-GAAP diluted earnings per share actually grew by nearly 7x.
Let’s take a look at the highlighted numbers below. A 1,274% increase for GAAP earnings means that they grew by 13.74x, and non-GAAP growth of 593% is a 6.93x multiple. If you’re still unsure of the math, read the next section below!
If a stock goes up by 100%, it doubles in value, right? And if your money doubles, you can either say you doubled your money or that you 2x’d your money. Notice how the ONE-hundred percent gives you a TWO x gain? In the same way, a 593% gain gives you a 6.93x gain. If you want, you can play around with our percent change calculator below or by clicking here.
Step-by-Step Calculation
Understanding the Basics: The first step in calculating growth is straightforward: subtract the initial value from the final value, then divide by the initial value. This gives you the growth rate in percentage form.
From Percentage to Multiple: To convert this percentage into a growth multiple, add 1 to the decimal form of the percentage. For example, a 100% increase translates to a growth multiple of 2x (since 1 + 1 = 2).
Common Pitfalls: A frequent error occurs when analysts shortcut this process, interpreting, for instance, a 200% increase directly as 2x growth, when it is actually 3x (since 1 + 2 = 3).
Practical Example
Let's apply this to a hypothetical scenario similar to Nvidia's reporting oversight:
If a company's earnings per share (EPS) grow from $1 to $7 over a year, the growth rate is 600%.
The calculation is: (7−1)/1×100=600(7−1)/1×100=600.
To find the growth multiple, we convert this into decimal form (600% = 6.00) and then add 1, resulting in a 7x growth multiple.
The Takeaway
Even top companies make simple mistakes like these, which can lead to inaccuracies in financial reporting. However, now you know how to look out for these mistakes and maybe even potentially take advantage of them.
