Rule of 40 Calculator

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Revenue Growth Rate (%)

Profit Margin (%)

Results

Rule of 40 Score

35

Fail — threshold is 40

Revenue Growth Rate	20%
Profit Margin	15%
Combined Score	35

What Is the Rule of 40?

The Rule of 40 is a popular benchmark used by SaaS and other high-growth software companies to balance growth against profitability. It states that a healthy company's annual revenue growth rate plus its profit margin should equal or exceed 40%. A score of 40 or higher generally signals an efficient, well-balanced business; a lower score suggests the company may be growing too slowly relative to its losses, or vice versa.

The Rule of 40 adds revenue growth and profit margin, comparing the total to a 40% benchmark.

How to Use This Calculator

Enter your year-over-year revenue growth rate as a percentage and your profit margin as a percentage. The profit margin can be any consistent measure your team uses — EBITDA margin, free cash flow margin, or operating margin — as long as you apply it the same way each period. The calculator adds the two figures and tells you whether you pass the 40% threshold.

The Formula Explained

The math is intentionally simple:

$$\text{Rule of 40} = \text{Revenue Growth Rate \%} + \text{Profit Margin \%}$$

A company growing revenue 30% with a 15% margin scores 45 and passes. A company growing 60% but burning cash at a -25% margin still scores 35 and fails. The rule rewards companies that trade growth for profit (or profit for growth) in a balanced way.

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Companies can trade growth for profit along the line where the two add up to 40%.

Worked Example

Suppose a SaaS startup grows revenue 35% year over year and posts a profit margin of 8%. Its Rule of 40 score is

$$35 + 8 = 43$$

Because 43 is greater than 40, the company passes the benchmark and is considered efficiently balanced.

FAQ

Does the Rule of 40 apply to early-stage startups? It is most meaningful for companies with $1M+ in annual recurring revenue. Very early companies often have volatile numbers that make the rule less reliable.

Which profit margin should I use? Many investors prefer EBITDA or free cash flow margin, but consistency matters more than the specific metric. Use the same definition across periods.

Is a higher score always better? Generally yes, but extremely high scores can sometimes mean a company is under-investing in growth. The rule is a directional guide, not a strict rule.