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Rule of 40 Calculator
Growth rate + profit margin ≥ 40% = the SaaS health benchmark used by every public investor. Top SaaS hits 50-60+.
Rule of 40 — formula and benchmarks
The Rule of 40 states that a healthy SaaS company's annual revenue growth rate plus its profit margin (typically free cash flow or EBITDA margin) should be at least 40%. Below 40% — invest more in growth or cut burn. The rule is the single most-cited SaaS efficiency benchmark.
The formula
Rule of 40 = growth rate + profit margin # Profit margin: free cash flow margin OR EBITDA margin # Growth: YoY ARR growth %
What healthy numbers look like
- ≥60: Top-tier. Snowflake (122 at IPO), Datadog (75), Crowdstrike (88).
- 40-60: Pass — efficient growth.
- 20-40: Below the rule. Decide: invest in growth or cut burn.
- 0-20: Multiple compression risk.
- Negative: Shrinking AND burning — major intervention needed.
Common mistakes the calculator avoids
- Using net income margin instead of FCF / EBITDA margin — different definitions.
- Annualizing one good quarter — use trailing 12 months.
- Ignoring stage — early-stage growth often justifies negative margins; the rule applies most strictly to Series C+.
How to use this calculator
Two inputs. The answer is the most quoted SaaS metric in 2024-2026.
Calculate YoY ARR growth
(this year ARR - last year ARR) / last year ARR × 100%. Use trailing 12-month ARR.
Calculate profit margin
Free cash flow / revenue × 100% (preferred) or EBITDA / revenue × 100%.
Add them together
Growth + margin = your Rule of 40 score.
Compare to benchmarks
40 = pass, 50-60+ = excellent. Below 40 needs explanation.
Trend it over time
Single-quarter spikes are normal. Trend is what investors and boards actually care about.
Frequently asked questions
A SaaS health benchmark: revenue growth rate + profit margin (typically FCF or EBITDA margin) should be at least 40%. Coined around 2015, it has become the dominant single metric for SaaS efficiency.
Add YoY revenue growth rate to free cash flow margin (both as percentages). If the sum is 40% or above, the company passes. Some operators use EBITDA margin instead of FCF margin — the math is the same.
Yes — more than ever. The 2022-2024 SaaS multiple compression made profit margins matter as much as growth, and Rule of 40 captures both in one number. Public SaaS investors weight it heavily.
Often only via aggressive growth. A pre-Series-B company growing 100% but burning hard hits Rule of 40 if growth + (negative) margin still totals 40+. Many do. The benchmark gets stricter post-Series-C.
Single quarters are noisy. Investors look at trailing-12-month growth and TTM profit margin. Sustained passing of the rule for 4+ quarters is what counts.
Significantly. Public SaaS companies above 40 typically trade at 8-15× revenue. Below 30 often trade at 3-6× revenue. The math is direct: every 10 points of Rule of 40 score adds roughly 1-2× to revenue multiple.
