SaaS Metrics Tool

Rule of 40 Calculator

Find out if your software company strikes the perfect balance between growth and profitability.

Annual Revenue Growth (%)

35%

EBITDA Margin / Free Cash Flow (%)

+10%

RULE OF 40 SCORE

Growth + Margin

COMPANY STATUS

Healthy (Rule of 40 Met)

Based on score threshold

Example Scenarios: 40% Growth + 0% Margin = 40 OR 20% Growth + 20% Margin = 40

Understanding The Rule of 40

Your complete guide to SaaS Growth and Profitability Benchmarks.

What is the Rule of 40?

The Rule of 40 is a principle that states a software (SaaS) company's combined growth rate and profit margin should equal or exceed 40%. It is heavily utilized by venture capitalists and private equity firms as a quick litmus test for the health of a recurring revenue business.

How is it Calculated?

Rule of 40 = Revenue Growth Rate (%) + EBITDA Margin (%)

Note: Startups often substitute **Free Cash Flow Margin** in place of EBITDA Margin depending on how heavily they capitalize software development costs.

Why 40%? The Tradeoff Mechanics

Software companies have a unique tradeoff between hyper-growth and sheer profitability. The Rule of 40 acknowledges that you can be burning cash if you are growing blazing fast, or you can grow slower if you are throwing off pure cash. Both are perfectly acceptable if they sum to over 40.

High Growth / Cash Burn: 60% Growth Rate + (-20%) Profit Margin = 40
Steady State: 20% Growth + 20% Profit Margin = 40
Cash Cow / Low Growth: 5% Growth + 35% Profit Margin = 40

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