Rule of 40 Calculator
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Add your revenue growth rate to your profit margin to get your Rule of 40 score and see instantly whether your business clears the 40% benchmark that investors watch. Runs entirely in your browser.
What the Rule of 40 measures
The Rule of 40 is a shorthand health check popular among SaaS investors and operators. It states that a healthy software company's revenue growth rate plus its profit margin should add up to at least 40%. The elegance is in the trade-off it captures: growth and profitability pull in opposite directions, and this single number rewards companies that strike a sensible balance between the two.
A hyper-growth startup might grow 70% while running a −30% margin and still score 40. A mature, efficient business might grow 15% at a 25% margin and also score 40. Both pass — the rule does not dictate how you get there, only that the combination is strong.
The formula
The calculation could not be simpler, which is a large part of why it caught on.
- score = revenue growth rate (%) + profit margin (%)
- Pass if score ≥ 40, fall short if score < 40.
- Profit margin is typically EBITDA margin or free cash flow margin — pick one and apply it consistently.
Choosing your inputs carefully
Growth is usually year-over-year revenue growth, measured on recurring revenue for subscription businesses. The margin input is where people differ: some use EBITDA margin, others free cash flow margin, and each can move the score by several points.
The rule was designed for companies at meaningful scale — roughly $1M+ in recurring revenue and beyond. For very early-stage businesses growth rates are so high that the score is almost meaningless, and for very large enterprises the framework loses precision. Treat it as a directional gauge, not a verdict.
Reading the score in context
A passing score signals that a company is efficient with its growth — it is not simply buying revenue by torching cash. Consistently sitting above 40 over several quarters is a stronger signal than a single lucky reading, because both growth and margin can swing quarter to quarter.
Do not treat the number as the whole story. Two companies can both score 40 with wildly different risk: one growing fast and burning, another slow and profitable. Use the Rule of 40 alongside net revenue retention, gross margin and runway to build a full picture, and remember that a score just under 40 is not a failure so much as a prompt to look closer.
Frequently asked questions
Should I use EBITDA or free cash flow margin?
Either is acceptable and widely used. FCF margin is more conservative because it accounts for capital and working-capital needs; EBITDA is easier to compute. Whichever you pick, use it consistently across periods.
Does the growth number use ARR or total revenue?
For SaaS, year-over-year growth in recurring revenue (ARR or MRR annualised) is standard. Using total revenue that includes one-off services can distort the growth component.
What if my margin is negative?
That is normal for high-growth startups. Enter it as a negative percentage; the tool subtracts it from your growth, which is exactly how the rule is meant to work.
Is 40 a hard line?
No. It is a rule of thumb, not a law. A 38 is not meaningfully worse than a 41. Look at the trend across several quarters rather than obsessing over a single reading.
Does the Rule of 40 apply to non-SaaS businesses?
It was designed for recurring-revenue software companies. You can apply it elsewhere, but the 40% benchmark is calibrated to SaaS economics and may not translate cleanly to other models.
How often should I recalculate it?
Quarterly is common, using trailing figures. Because both inputs fluctuate, tracking the score over time reveals far more than any single snapshot.
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