What is ‘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.
Explaining ‘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.
Further Reading
- Dynamic scoring: A back-of-the-envelope guide – www.sciencedirect.com [PDF]
- Household balance sheet channels of monetary policy: A back of the envelope calculation for the Euro Area – www.sciencedirect.com [PDF]
- The cost of basic income: Back-of-the-envelope calculations – www.degruyter.com [PDF]
- The impact of food inflation on urban poverty and its monetary cost: some back‐of‐the‐envelope calculations – onlinelibrary.wiley.com [PDF]
- 'Back of the Envelope': Pragmatic Planning for Sustainable Rural Community Development – www.tandfonline.com [PDF]
- The economics of traffic congestion – www.jstor.org [PDF]
- Grazers: the overlooked threat to the sustained production of future algal biofuels – www.tandfonline.com [PDF]
- What's wrong with the back of the envelope? A call for simple (and timely) benefit–cost analysis – onlinelibrary.wiley.com [PDF]
