{
  "slug": "rule-of-40",
  "title": "Rule of 40 Calculator",
  "heading": "Rule of 40 Calculator for SaaS",
  "category": "financial",
  "url": "https://www.revenuelab.fyi/toolbox/rule-of-40",
  "summary": "Check whether your growth rate plus profit margin clears the 40% bar.",
  "description": "The Rule of 40 says a healthy SaaS company's revenue growth rate plus profit margin (usually EBITDA margin or free cash flow margin) should add up to 40% or more. It's a shorthand that lets investors compare a fast-growing, unprofitable company against a slower-growing, profitable one on roughly equal footing — 60% growth with -20% margin scores the same 40 as 10% growth with 30% margin, even though those are very different businesses operationally. It's most useful as a single sanity-check number, not a precise valuation tool: companies scoring well above 40 (60-80+) often command premium multiples, while companies persistently below 40 face multiple compression regardless of which side of the equation (growth or margin) is dragging the score down. The rule breaks down for very early-stage companies (under a few million ARR) where growth rates are naturally triple-digit and margin is deeply negative by design, and for very large, mature companies where 40% combined is a much higher bar relative to their size than it is for a mid-stage company.",
  "formula": "Rule of 40 Score = Revenue Growth Rate % + Profit Margin % (EBITDA or FCF margin)",
  "dateModified": "2026-09-30",
  "run_url": "https://www.revenuelab.fyi/api/public/calc?tool=rule-of-40",
  "inputs": [
    {
      "id": "growthRate",
      "label": "Annual revenue growth rate",
      "kind": "number",
      "hint": null,
      "default": 35,
      "unit": "%",
      "min": -50,
      "max": 300
    },
    {
      "id": "profitMargin",
      "label": "EBITDA or FCF margin",
      "kind": "number",
      "hint": null,
      "default": 8,
      "unit": "%",
      "min": -200,
      "max": 60
    }
  ],
  "outputs": [
    {
      "id": "score",
      "label": "Rule of 40 Score",
      "format": "number",
      "hint": null,
      "primary": true
    },
    {
      "id": "rating",
      "label": "Assessment",
      "format": "raw",
      "hint": null,
      "primary": false
    },
    {
      "id": "growth",
      "label": "Growth rate component",
      "format": "percent",
      "hint": null,
      "primary": false
    },
    {
      "id": "margin",
      "label": "Profit margin component",
      "format": "percent",
      "hint": null,
      "primary": false
    }
  ],
  "worked_example": {
    "inputs": [
      "Annual revenue growth rate: 35 %",
      "EBITDA or FCF margin: 8 %"
    ],
    "outputs": [
      "Rule of 40 Score: 43",
      "Assessment: Healthy",
      "Growth rate component: 35.0%",
      "Profit margin component: 8.0%"
    ]
  },
  "how_to": {
    "title": "How to use this",
    "steps": [
      "Enter annual revenue growth rate (%).",
      "Enter ebitda or fcf margin (%).",
      "Read your rule of 40 score on the right — it updates as you type.",
      "Hit Share to keep the scenario or send it to someone."
    ]
  },
  "scenarios": [
    {
      "name": "Conservative",
      "description": "Lower-end numbers — what if things land soft?",
      "values": {
        "growthRate": 21,
        "profitMargin": 5
      }
    },
    {
      "name": "Typical",
      "description": "Defaults — the most common real-world setup.",
      "values": {
        "growthRate": 35,
        "profitMargin": 8
      }
    },
    {
      "name": "Ambitious",
      "description": "Higher-end numbers — what if things really pop?",
      "values": {
        "growthRate": 56,
        "profitMargin": 13
      }
    }
  ],
  "limitations": [
    "Results are estimates before tax, fees, and inflation unless an input explicitly covers them.",
    "Rates are treated as fixed for the whole period — variable-rate products will drift from this projection.",
    "This is educational maths, not financial advice. Check anything contractual with the lender or your accountant."
  ],
  "faq": [
    {
      "q": "Should I use EBITDA margin or free cash flow margin?",
      "a": "Either is used in practice; FCF margin is generally considered the more rigorous version since it accounts for capex and working capital changes that EBITDA ignores. Be consistent about which one you use over time and disclose which you're reporting, since they can differ by 5-15 points for the same company."
    },
    {
      "q": "Is a Rule of 40 score of exactly 40 good?",
      "a": "It's the baseline healthy threshold, not a great score by itself. Top-quartile public SaaS companies often score 50-70+. Treat 40 as 'acceptable, keep watching' rather than 'target achieved and done' — investors reward scores meaningfully above 40, especially when driven by margin rather than growth alone."
    },
    {
      "q": "Does it matter whether growth or margin drives the score?",
      "a": "Increasingly yes to investors — since 2022, the market has rewarded margin-driven Rule of 40 scores more than pure growth-driven ones, reflecting a broader shift toward valuing capital efficiency over growth-at-any-cost. Two companies at the same score of 40 can get very different multiples depending on the mix."
    },
    {
      "q": "Does Rule of 40 work for early-stage startups?",
      "a": "Not well below roughly $5-10M ARR — growth rates are naturally huge and volatile off a small base while margins are deeply negative by design as the company invests ahead of revenue. It becomes a more meaningful benchmark once a company has enough scale that both numbers stabilize."
    }
  ],
  "related": [
    "https://www.revenuelab.fyi/toolbox/saas-cash-runway-growth",
    "https://www.revenuelab.fyi/toolbox/burn-multiple",
    "https://www.revenuelab.fyi/toolbox/saas-gross-margin"
  ],
  "license": "CC-BY-4.0",
  "citation": "RevenueLab — Rule of 40 Calculator (https://www.revenuelab.fyi/toolbox/rule-of-40)"
}