Rule of 40 Calculator
Add your revenue growth rate to your profit margin and check whether a software business clears the Rule of 40 benchmark investors use to balance growth and profitability.
How it works
Rule of 40 score = revenue growth rate % + profit margin % · Healthy if score ≥ 40
The Rule of 40 says a healthy software company’s growth rate plus its profit margin should total at least 40%. It lets a fast grower justify thin or negative margins while it captures a market, and demands that a slower grower be genuinely profitable. The margin term is typically EBITDA or free-cash-flow margin; the rule is a quick screen, not a valuation, and it works best for scaled SaaS rather than very early-stage companies.
Worked example
A company growing 30% a year with a 15% EBITDA margin scores 30 + 15 = 45, clearing the bar by 5 points. Another growing just 10% would need a 30% margin to reach the same 40.
Frequently asked questions
Which margin should I use?
Most analysts use EBITDA margin or free-cash-flow margin. The key is consistency — pick one profitability measure and track the score with it over time rather than switching definitions.
Can a company pass with negative margins?
Yes. That is the point of the rule: a business growing 60% a year can run a −15% margin and still score 45. High growth is allowed to fund losses, as long as the combined figure stays above 40.
Does the Rule of 40 apply to early-stage startups?
Less well. Very small companies can post triple-digit growth that makes the score meaningless. It is most useful once revenue is at scale and growth has settled into a sustainable range.
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Educational estimate, not financial advice.