About the Rule of 40 Calculator
The Rule of 40 says a healthy software company’s revenue growth rate plus its profit margin should add up to at least 40%. This calculator gives you that score from either percentages you already know or raw figures — last year’s revenue, this year’s revenue and profit — and tells you how far above or below the line you are.
It is useful for SaaS founders balancing growth against burn, CFOs preparing board materials, and investors screening companies. A fast-growing startup can pass while losing money, and a slower, profitable business can pass on margin alone; the rule rewards the combination.
There is no single official margin definition. EBITDA margin is the most common, but many investors prefer free-cash-flow margin, and some use operating margin. Pick one and apply it consistently when you compare periods or companies.
With the default inputs, the rule of 40 score is 45%. Change any value above to recalculate instantly.
How to use the rule of 40 calculator
- 1Choose whether to enter percentages or revenue and profit figures.
- 2Enter year-over-year revenue growth, or last year’s and this year’s revenue.
- 3Enter your profit margin, or profit in dollars (negative for a loss).
- 4Read the score and verdict, then check the growth or margin needed to reach 40.
Formula and method
The score simply adds the year-over-year revenue growth rate to the profit margin, both in percent. A score of 40 or more passes. Negative margins (losses) subtract from growth, so a company growing 60% while burning 25% of revenue scores 35 and falls short.
When you enter raw figures, growth is measured against last year’s revenue and margin against this year’s revenue. The “needed” outputs hold one side fixed and show what the other would have to be to reach exactly 40.
- Growth %
- Year-over-year revenue (or ARR) growth
- Margin %
- EBITDA, free-cash-flow or operating margin — use one consistently
Worked examples
30% growth with a 15% margin
Growth of 30% plus a 15% EBITDA margin gives a score of 45, five points above the line. At a 15% margin the company would still pass with 25% growth.
Fast growth, heavy burn
Growing 60% while losing 25% of revenue scores 60 − 25 = 35. Cutting losses to a −20% margin, or growing 65%, would bring it to 40.
From revenue and profit figures
Revenue rose from $10M to $12.5M, 25% growth. Profit of $1.5M on $12.5M is a 12% margin. The score of 37 is three points short.
Frequently asked questions
What is the Rule of 40 in SaaS?+
It is a rule of thumb that a software company’s revenue growth rate plus profit margin should be at least 40%. It lets investors compare fast-growing, loss-making companies with slower, profitable ones on one scale.
Which profit margin should I use?+
EBITDA margin is the most common choice, but many investors prefer free-cash-flow margin because it reflects actual cash. Operating margin is also used. Stick to one definition when comparing periods or companies.
Does the Rule of 40 apply to early-stage startups?+
It is most meaningful once a company has roughly $10M+ of ARR. Very early startups can post huge growth rates from a tiny base, which makes the score volatile and less informative.
Is it better to pass on growth or on margin?+
Public-market studies have generally found investors reward growth more heavily than margin at the same score, but either route passes. The right mix depends on market size, competition and how much capital you can raise.
Can I use ARR growth instead of revenue growth?+
Yes, many private SaaS companies use ARR growth because it reflects the current run rate. Just keep the growth measure consistent over time.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.