What this calculator does
The Rule of 40 is a rough health check used across the software industry: add a company’s revenue growth rate to its profit margin, and if the total clears 40, the business is considered to be balancing growth and profitability reasonably well. Below 40, the combination is generally seen as a warning sign, though not on its own a verdict.
The appeal of the rule is that it explicitly allows a trade-off. A company growing at 35% with a 5% margin scores the same as one growing at 15% with a 25% margin: the rule treats fast, unprofitable growth and slower, highly profitable growth as equally acceptable, as long as the combined total holds up.
The formula
The score is nothing more than growth rate plus profit margin, both expressed as percentages and simply added together. There is no weighting, no compounding, and no adjustment for company size or stage: its simplicity is deliberate, meant as a quick screen rather than a precise valuation tool.
| Term | Meaning |
|---|---|
| Growth rate | Revenue growth, most often measured year over year. |
| Profit margin | Profitability, commonly EBITDA margin or free cash flow margin for this rule, expressed as a percentage of revenue. |
| Rule of 40 score | Growth rate + profit margin, in percentage points. |
The inputs explained
| Field | What to enter |
|---|---|
| Revenue growth rate (%) | The revenue growth rate for the period, most often measured year over year. |
| Profit margin (%) | The profit margin for the same period. Can be negative for a business that is not yet profitable. |
When to use it
Screening a SaaS company at a glance
Investors and operators use the Rule of 40 as a fast first check before digging into a fuller set of metrics, precisely because it needs only two numbers that are usually already known.
Deciding whether to prioritise growth or margin
A business below the benchmark can see directly how much growth or how much margin improvement would close the gap, which is a useful framing for a strategy conversation.
Explaining why an unprofitable company can still be considered healthy
A young company burning cash but growing at 60% can comfortably clear 40 even with a negative margin, which is exactly the trade-off the rule is designed to accommodate.
Tracking the trend over time, not just a single score
A score drifting down over several quarters, even if still above 40, often signals a company sliding from a growth phase toward a profitability phase, which is worth watching independently of the pass/fail line.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How the score changes with growth rate, margin fixed at 15%
A steady 15% profit margin against a range of revenue growth rates.
| Growth rate | Rule of 40 score | Verdict |
|---|---|---|
| 10% | 25.0 points | Below the benchmark: growth plus margin falls short of 40 |
| 20% | 35.0 points | Below the benchmark: growth plus margin falls short of 40 |
| 25% | 40.0 points | Clears the benchmark: growth plus margin is healthy |
| 28% | 43.0 points | Clears the benchmark: growth plus margin is healthy |
| 35% | 50.0 points | Clears the benchmark: growth plus margin is healthy |
| 45% | 60.0 points | Clears the benchmark: growth plus margin is healthy |
How the score changes with margin, growth fixed at 28%
A steady 28% growth rate against a range of profit margins, including a loss-making scenario.
| Profit margin | Rule of 40 score | Verdict |
|---|---|---|
| -5% | 23.0 points | Below the benchmark: growth plus margin falls short of 40 |
| 0% | 28.0 points | Below the benchmark: growth plus margin falls short of 40 |
| 5% | 33.0 points | Below the benchmark: growth plus margin falls short of 40 |
| 12% | 40.0 points | Clears the benchmark: growth plus margin is healthy |
| 15% | 43.0 points | Clears the benchmark: growth plus margin is healthy |
| 25% | 53.0 points | Clears the benchmark: growth plus margin is healthy |
Questions
What counts as a good Rule of 40 score?
40 or above is the conventional pass line. There is no official upper bound; a much higher score generally reflects a business firing on both growth and profitability at once, though very high scores are uncommon and often not sustained for long.
Which profit margin should I use: EBITDA, free cash flow, or net income?
EBITDA margin or free cash flow margin are the two most commonly used in practice. Net income margin is less standard for this rule since it can be distorted by non-operating items. Whichever is used, be consistent when comparing across periods or companies.
Can a company with negative margin still clear the Rule of 40?
Yes, as long as its growth rate is high enough to offset the negative margin and still sum to 40 or more: a company growing 50% with a −8% margin scores 42, comfortably clearing the benchmark.
Does the Rule of 40 apply to any business, or just SaaS?
It originated in software and subscription businesses, where growth and margin trade off in a fairly predictable way. It is used more loosely elsewhere, but the benchmark of 40 specifically comes from SaaS industry norms and may not transfer cleanly to other business models.
Is a higher score always better?
Generally, yes, but the rule does not distinguish how a score was achieved. A company that hits 40 through unsustainable, unprofitable growth is not necessarily healthier than one that hits 35 through a well-balanced mix: the score is a screen, not a complete diagnosis.
For the growth side of this equation in more detail, see the year-over-year growth calculator. For the underlying revenue figures, use the revenue growth and target planner.