Rule of 40 Calculator Formula
Understand the math behind the rule of 40 calculator. Each variable explained with a worked example.
Formulas Used
Rule of 40 Score
rule_of_40 = revenue_growth_rate + profit_marginDistance from 40
above_below = (revenue_growth_rate + profit_margin) - 40Variables
| Variable | Description | Default |
|---|---|---|
revenue_growth_rate | Revenue Growth Rate (YoY)(%) | 30 |
profit_margin | Profit 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.
- 01Rule of 40 = 30% + 15% = 45
- 02Distance from 40 = 45 - 40 = +5
- 03The company exceeds the Rule of 40 by 5 points.
Frequently Asked Questions
Which profit margin should I use?
The most common choices are EBITDA margin or free cash flow margin. Some analysts use operating margin. Be consistent and use the same measure when comparing across companies.
Is the Rule of 40 a strict threshold?
No, it is a guideline. Early-stage startups prioritizing growth may score below 40 intentionally. Mature companies should aim to consistently hit or exceed 40 to demonstrate balanced financial health.
Learn More
Guide
Understanding SaaS Metrics
A comprehensive guide to SaaS metrics including MRR, ARR, churn rate, LTV, CAC, and the Rule of 40. Learn what to track and how to benchmark your SaaS business.
Ready to run the numbers?
Open Rule of 40 Calculator