DEFINITION of 'BackOfTheEnvelope Calculation'
An informal mathematical computation, often performed on a scrap of paper such as an envelope. A backoftheenvelope calculation uses estimated and/or rounded numbers to quickly develop a ballpark figure. The result should be more accurate than a guess, but will be less accurate than a formal calculation performed using precise numbers and a spreadsheet or calculator.
BREAKING DOWN 'BackOfTheEnvelope Calculation'
Backoftheenvelope calculations might be used to determine whether further research and more detailed calculations are warranted. For example, an investor might look at a company's annual report and do a backoftheenvelope calculation to get its pricetoearnings ratio. If it is low enough to imply value, the investor can do a proper calculation which might include factoring in the weighted average shares outstanding for the year. If the quick estimate gave a high P/E ratio, time could be saved.

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