The Rule of 40 says a healthy software company's revenue growth rate plus its profit margin should be at least 40%. Enter percentages or raw revenue and profit figures to get your score, see whether you pass and find the margin or growth you need to hit 40.
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Input
%
%
Use a minus sign for a loss, e.g. −15.
$
$
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EBITDA or free cash flow amount; negative for a loss.
Use the same measure each time you compare.
Enter your values to see the result.
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How to use the Rule of 40 Calculator
Choose how to enter data: percentages, or last year's and this year's revenue with this year's profit.
Enter revenue growth (year over year) and the profit margin; use a minus sign for losses.
Pick the margin type you use (EBITDA or free cash flow are most common).
Read your score and whether it passes the 40% bar.
Use the "needed" results and table to plan the growth and profit mix that gets you there.
Pass when the score is 40% or higher. Margin needed = 40 − growth; growth needed = 40 − margin.
Example from revenue figures: revenue rose from $10.0M to $12.8M, so growth = 2.8 ÷ 10 = 28%. EBITDA of $1.15M on $12.8M is a 8.98% margin. The score is 28 + 8.98 = 36.98%, about 3 points short; the company needs a 12% margin at its current growth.
Combinations that score exactly 40
Profile
Revenue growth
Profit margin
Score
Hyper-growth, heavy investment
80%
−40%
40%
Fast growth, still burning
55%
−15%
40%
Break-even grower
40%
0%
40%
Balanced
20%
20%
40%
Mature cash generator
5%
35%
40%
The rule lets a company trade growth for profit: as growth slows, margins are expected to rise to keep the total at 40% or above.
Frequently asked questions
What is the Rule of 40?
The Rule of 40 is a quick health check for software and SaaS companies: revenue growth rate (%) + profit margin (%) should be 40% or more. A company growing 30% with a 10% margin scores exactly 40; one growing 60% while losing 20% of revenue also scores 40.
Which profit margin should I use?
EBITDA margin and free cash flow (FCF) margin are the most common. Investors often prefer FCF because it reflects real cash generation. Pick one measure and use it consistently when comparing periods or companies.
Which growth rate should I use?
Usually year-over-year revenue or ARR growth. Some analysts use the last twelve months or a forward-looking forecast. Monthly growth rates must not be used directly; annualize them first.
Is a negative margin allowed?
Yes. Many fast-growing startups have negative margins. A company growing 70% with a −25% margin scores 45% and passes; one growing 20% with a −10% margin scores 10% and fails.
Does the Rule of 40 apply to early-stage startups?
It is mainly used for growth-stage and public SaaS companies, often from around $10 million+ in ARR. Very young companies can show extreme growth from a small base, which makes the score less meaningful.
What does failing the Rule of 40 mean?
It is not a verdict on the business, but it signals that growth is not fast enough to justify the losses, or profit is too low for the growth rate. The calculator shows how many points of margin or growth close the gap.
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