Rule of 40 calculator
Rule of 40 is a profitability metric, calculated as Revenue growth % + EBITDA margin %. SaaS heuristic, not an accounting measure. Many use free-cash-flow margin instead of EBITDA margin, and year-over-year ARR growth instead of revenue growth — label which.
- Formula
- Revenue growth % + EBITDA margin %
Rule of 40
Rule of 40 = Revenue growth % + EBITDA margin %%
%
A loss margin is negative.
Rule of 40 score
43.0%
How it’s worked out
- 1Revenue growth + EBITDA margin55.0% + -12.0%43.0%
At or above 40%: passes.
Runs in your browser; nothing you type is sent anywhere. Amounts in US dollars.
How to read it
The rule of 40 trades growth against profitability: a company growing 60% can burn 20%; one growing 10% should earn 30%.
It is most meaningful for software companies past early stage; very young companies with tiny bases can pass on growth alone.
Common mistakes
- Mixing a monthly growth rate with an annual margin.
- Switching the margin definition between periods.
Questions
- What is the rule of 40?
- A heuristic for software companies: revenue growth rate plus profit margin should be at least 40%.
- Which margin should I use?
- EBITDA margin is the most common choice; some investors use free cash flow margin. State which one you use.
Read it with
The metrics read alongside this one, and the terms it is confused with.
- EBITDA calculatorEBITDA is a profitability metric, calculated as Net income + interest + income taxes + D&A (≈ operating income + D&A with no other non-operating items).Calculator
- Magic number calculatorMagic number is a unit-economics metric, calculated as Net new ARR in the quarter ÷ prior-quarter S&M (equivalently (Δ quarterly revenue × 4) ÷ prior-quarter S&M).Calculator
- Net new MRR calculatorNet new MRR is a recurring-revenue metric, calculated as New + Expansion − Contraction − Churned.Calculator
- Rule of 40Rule of 40 is a profitability metric, calculated as Revenue growth % + EBITDA margin %.Term
The formula is the one the glossary states, and the arithmetic is unit-tested. A ratio with nothing to divide by shows a dash — undefined is not zero. General information, not financial advice.