The Rule of 40 Calculator combines a software company’s revenue growth rate and profit margin into a single operating score. The common formulation adds annual growth to an EBITDA, operating, or free-cash-flow margin to show the balance between expansion and profitability.
SaaS teams and investors use the score as a compact comparison tool, especially when a faster-growing company is intentionally accepting lower margins. The calculator does not determine company quality by itself; accounting choices, scale, customer concentration, retention, and capital needs still matter.
1. Choose a growth metric
Use a consistent annual revenue or ARR growth rate.
2. Choose a margin definition
Select EBITDA, operating, or free-cash-flow margin and keep it consistent across comparisons.
3. Enter both percentages
Negative margins are permitted.
4. Review the combined score
The calculator adds growth and margin and shows the distance from 40.
5. Compare carefully
Use the same definitions and time periods when comparing companies or scenarios.
Both inputs are percentage points. A 30% growth rate plus a 10% margin produces a score of 40%, while 60% growth and a −15% margin produce 45%.
A score at or above 40 is often described as meeting the Rule of 40, but the threshold is a heuristic rather than an accounting standard.
Always state which growth and margin definitions were used before comparing scores.
Given: ARR growth of 32% and an EBITDA margin of 12%.
Calculation: Rule of 40 score = 32% + 12% = 44%.
Result: The company is 4 percentage points above the 40% reference level.
Yes. Strong growth can offset a negative margin in the arithmetic.
Use the definition appropriate to your analysis and disclose it. EBITDA and free-cash-flow margins can produce different scores.
The metric is generally used with annual or annualized growth. Do not add a quarterly growth rate to an annual margin without adjustment.
No. It is a widely used heuristic, and relevance varies by scale, market, business model, and capital intensity.
The Rule of 40 summarizes growth and profitability; it does not calculate enterprise value or an investment return.