Back-Of-The-Envelope Calculation

DEFINITION of 'Back-Of-The-Envelope Calculation'

An informal mathematical computation, often performed on a scrap of paper such as an envelope. A back-of-the-envelope 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 'Back-Of-The-Envelope Calculation'

Back-of-the-envelope 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 back-of-the-envelope calculation to get its price-to-earnings 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.

RELATED TERMS
  1. Historic Pricing

    A method for calculating the value of an asset using the last ...
  2. Constant Currencies

    An exchange rate that eliminates the effects of exchange rate ...
  3. Return On Net Assets - RONA

    A measure of financial performance calculated as: Fixed assets ...
  4. Calculation Agent

    An entity that determines the price of an investment product ...
  5. Average Return

    The simple mathematical average of a series of returns generated ...
  6. Average Price

    1. A representative measure of a range of prices that is calculated ...
Related Articles
  1. Retirement

    11 Social Security Calculators Worth Your Time

    The safest Social Security calculators to use when figuring benefits are on the official website. The best are the ones that access your actual record.
  2. Investing

    Calculating The Means

    Learn more about the different ways you can calculate your portfolio's average return.
  3. Investing

    Calculating Operating Margin

    Learn more about the measurement used to calculate what proportion of a company's revenue is left over after production costs.
  4. Retirement

    Why Online Retirement Planning Tools Could Betray You

    Retirement calculators on the web may paint a dangerously rosy picture of your future, according to new research from Texas Tech University.
  5. Investing

    Weighted Average

    Learn how to weigh the relative importances of data points in a calculated average.
  6. Active Trading

    Moving Averages: What Are They?

    By Casey Murphy, Senior Analyst ChartAdvisor.com Among the most popular technical indicators, moving averages are used to gauge the direction of the current trend. Every type of moving average ...
  7. Credit & Loans

    Smart Ways to Use a Mortgage Calculator

    When you're buying a home, it's essential to do due diligence about the true costs. Mortgage calculators will show you if you can afford the purchase.
  8. Forex Education

    Time Value Of Money: Determining Your Future Worth

    Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.
  9. Investing Basics

    Calculating Beta: Portfolio Math For The Average Investor

    Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you. Learn how to make your own.
  10. Markets

    P/E Ratio: What Is It?

    P/E is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by ...
RELATED FAQS
  1. How accurate are online mortgage calculators?

    Discover how to use online mortgage calculators to get an accurate estimate for monthly payments and what inputs are necessary ... Read Answer >>
  2. What is the difference between forward p/e and trailing p/e?

    Understand the difference between the trailing P/E ratio, which is the standard price-to-earnings calculation, and the forward ... Read Answer >>
  3. Where can I find a good compound interest calculator free on the Internet?

    Understand compound interest calculations and learn where you can find a good, free online compound interest calculator to ... Read Answer >>
  4. What is the formula for calculating the quick ratio in Excel?

    Understand the basics of the quick ratio, including how it is used as a measure of a company's liquidity and how to calculate ... Read Answer >>
  5. How do I calculate production costs in Excel?

    Find out about ways to use Excel to simplify production cost calculation and some sources of good templates and tips for ... Read Answer >>
  6. How do you calculate the quick ratio?

    Read about the quick ratio and about the different ways of calculating it, where to find information for it and when you ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center