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Rule of 40 Calculator

Rule of 40 checks whether a SaaS company's growth rate and profit margin, added together, clear a widely used health threshold.

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Rule of 40 Score

45%

What This Means

Revenue grew 30.0% with a 15.0% profit margin. At or above 40, this is considered a healthy balance of growth and profitability for a SaaS business.

Want the full picture, not just this one number?

Try the SaaS Growth Health Calculator

The Formula

Rule of 40 = ((Current Revenue − Prior Revenue) / Prior Revenue × 100) + (Profit / Current Revenue × 100)

Same formula as Revenue Growth Rate plus Profit Margin, just computed directly from two periods of revenue and a profit figure instead of two pre-calculated percentages.

Why It Matters

It's popular precisely because it prevents either extreme from looking healthy in isolation: a fast-growing company burning cash unsustainably, or a profitable company that's stopped growing, can both fail this check even though each metric alone might look fine. It's most useful as a quick gut check, not a precise diagnostic.

Example

A company grows revenue from $1,000,000 to $1,300,000 in a year, a 30% growth rate, while earning $195,000 in profit, a 15% margin on current revenue. Rule of 40 score is 30 plus 15, which equals 45, above the 40 threshold generally considered healthy.

Frequently Asked Questions

  • It's a useful signal, not a guarantee. A company can hit 40 with an unsustainable mix, like extremely high growth funded by heavy losses, so it's worth checking the two inputs individually, not just the sum.

  • It originated in and is most commonly applied to SaaS and subscription businesses, where growth and margin trade off against each other in a fairly predictable way.

Related Calculators

Gross Margin Calculator

From the Glossary

Rule of 40Gross MarginNet Revenue Retention (NRR)
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