Rule of 40 Calculator Formula

Understand the math behind the rule of 40 calculator. Each variable explained with a worked example.

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Formulas Used

Rule of 40 Score

rule_of_40 = revenue_growth_rate + profit_margin

Distance from 40

above_below = (revenue_growth_rate + profit_margin) - 40

Variables

VariableDescriptionDefault
revenue_growth_rateRevenue Growth Rate (YoY)(%)30
profit_marginProfit Margin (EBITDA or FCF Margin)(%)15

How It Works

How to Calculate the Rule of 40

Formula

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

The Rule of 40 is a SaaS industry benchmark that balances growth against profitability. A company growing at 60% with a -20% margin scores 40, just like one growing at 10% with a 30% margin. The idea is that fast-growing companies can afford to burn cash, while slower-growing ones must compensate with strong margins. Scores above 40 are considered attractive to investors.

Worked Example

A SaaS company growing revenue at 30% year-over-year with a 15% EBITDA margin.

revenue_growth_rate = 30profit_margin = 15
  1. 01Rule of 40 = 30% + 15% = 45
  2. 02Distance from 40 = 45 - 40 = +5
  3. 03The company exceeds the Rule of 40 by 5 points.

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