Rule of 40 Calculator

The Rule of 40 is a financial metric used in the SaaS industry to evaluate the health and sustainability of a company. It combines the company's growth rate and profitability to assess its overall performance. Here's the formula to calculate Rule of 40:

Rule of 40 = Revenue Growth % + Profit Margin %

Revenue Growth %: This represents the percentage increase in the company's revenue annually. It reflects the company's ability to generate more sales.

Profit Margin %: Profit margin is the percentage of revenue that remains as profit after deducting expenses. A higher profit margin indicates better profitability.

For example, if a company has a revenue growth rate of 30% and a profit margin of 15%, the Rule of 40 would be:

Rule of 40 = 30% + 15% = 45%

In this case, the company meets the Rule of 40 criterion.

The Rule of 40 suggests that a healthy, sustainable business should have a combined score of 40 or higher. In other words, if a company has a high growth rate, it can compensate for a lower profit margin, and vice versa. The Rule of 40 helps investors and stakeholders evaluate whether a company is striking a good balance between growth and profitability.