Rule of 40 Calculator

Use EBITDA, net income, or free cash flow for "profit" — whichever you track — as long as you use the same measure every time you check this score. A loss is a negative number.

What the Rule of 40 actually tells you

The Rule of 40 says a healthy SaaS company's revenue growth rate plus its profit margin should add up to 40% or more. It's a single number that penalizes chasing growth while burning cash without limit, and equally penalizes chasing profitability while growth stalls — it wants you to have some combination of the two, not necessarily both maxed out.

A company growing 60% a year while losing 20% of revenue scores 40 (60 − 20) and passes. A company growing 10% while running a 30% profit margin also scores 40 and passes. Both are considered fine by this metric even though they look completely different day to day — that's the point: it's a trade-off line, not a growth target or a profit target on its own.

How to use it

• Early-stage / venture-backed and still small: investors mostly expect growth to carry the score, so a large loss is tolerated if growth is very high.
• Bootstrapped or profitability-focused: it's completely fine — and often the right call — to pass the Rule of 40 with modest growth and a solid margin instead of high growth and a loss.
• Check it once or twice a year, not monthly — both revenue growth rate and profit margin are noisy quarter to quarter, and the Rule of 40 is meant as a yearly trajectory check, not a KPI to chase weekly.

Common mistakes

• Mixing profit measures between checks (EBITDA one year, net income the next) — the score isn't comparable to itself unless the profit definition stays consistent.
• Applying it to a pre-revenue or very early company, where a single new customer swings the growth rate wildly and the score is mostly noise.
• Treating 40 as a hard pass/fail cliff rather than a rough health band — 38 and 42 mean roughly the same thing; the real signal is the trend over time, and how the growth/margin mix is changing (see the MRR growth calculator and pricing & margin calculator to dig into each half separately, or the burn multiple calculator for how efficiently spend is converting into growth).

Frequently asked questions

What does a Rule of 40 score actually measure?

Revenue growth rate plus profit margin. A company growing 60% a year while losing 20% of revenue scores 40 (60 − 20) and passes; a company growing 10% with a 30% margin also scores 40. It's a trade-off line, not a growth or profit target on its own.

Is 40 a hard pass/fail cutoff?

No — treat it as a rough health band, not a cliff. 38 and 42 mean roughly the same thing; the real signal is the trend over time and which half (growth or margin) is changing.

How often should I check my Rule of 40 score?

Once or twice a year, not monthly. Both revenue growth rate and profit margin are noisy quarter to quarter, and the Rule of 40 is meant as a yearly trajectory check.