Is your SaaS company growing in a healthy way? The Rule of 40 is the metric favoured by investors and venture capital funds to answer: the sum of the growth rate and the profit margin should be at least 40%. This calculator determines it from your numbers: it calculates revenue growth, the EBITDA margin and the free cash flow margin, and adds growth and margin to tell you whether you pass the threshold — the sign of a business that balances expansion and profitability.

What the Rule of 40 is

The Rule of 40 states that, for a SaaS company, the sum of the annual revenue growth rate and the profit margin should be at least 40. A company growing 30% with a 15% margin reaches 45 and passes the rule; one growing 20% with a 10% margin stops at 30 and does not pass it. It is a quick test to understand whether a SaaS is growing in a financially sustainable way, without burning cash excessively to fuel growth.

Why it matters for SaaS and investors

For investors, the Rule of 40 is a shortcut to assess the quality of a SaaS. Companies that pass it tend to get higher valuations, because they prove they can grow without destroying value. It is particularly useful because it captures the fundamental trade-off of software: growing fast costs money (marketing, sales, development), so high growth justifies low margins, but only up to a point. The rule sets that point at 40%.

Growth and profitability: the trade-off

The heart of the Rule of 40 is the trade-off between growth and profitability. A young company can grow 60% while losing money (negative margin), and that is fine if the sum stays above 40. A mature company grows less, maybe 15%, but compensates with high margins, 30% or more. Both can pass the rule following opposite strategies. The Rule of 40 rewards neither growth alone nor profit alone: it rewards their balance, adapting to the company's stage.

EBITDA vs Free Cash Flow

The margin in the Rule of 40 can be calculated in different ways, and the two most used are EBITDA and free cash flow. The EBITDA margin measures operating profitability; the free cash flow margin measures the cash actually generated after investments. The FCF version is often stricter and closer to financial reality, because cash cannot be manipulated as much as an accounting figure. This calculator shows both versions, so you see the Rule of 40 from two complementary perspectives.

How the calculator works

Enter the current year revenue, the prior year revenue, the EBITDA, the free cash flow and the rule threshold (40 by default). The calculator computes the growth rate (revenue change), the EBITDA margin and the FCF margin (on current revenue), then adds growth and margin to get the Rule of 40 in both versions. The verdict tells you whether you pass, are near or below the threshold.

The values you need

The current year revenue and the prior year one are used to calculate growth: for SaaS, ARR (Annual Recurring Revenue) is often used. The EBITDA is operating income before depreciation, interest and taxes. The free cash flow is the cash generated after investments. The threshold is the reference value, typically 40, but you can change it to use the rule of 30 or 50. Use real values for a reliable result.

Revenue growth

The revenue growth is the percentage change between current and prior year revenue. It is the first addend of the Rule of 40 and often the most important for SaaS in the expansion phase. A growth of 43% means revenue went, for example, from 3.5 to 5 million. For young companies growth is the main engine: they can pass the rule on growth alone, even with negative margins, if the expansion speed is sufficient.

The margin (EBITDA / FCF)

The margin is the second addend: EBITDA or free cash flow divided by current revenue. It measures how much of the takings translates into profit or cash. An EBITDA margin of 10% on 5 million of revenue means €500,000 of EBITDA. For mature companies the margin becomes the main contribution to the Rule of 40, because growth naturally slows with size. The rule accepts that, as growth falls, the margin rises to compensate.

The Rule of 40 (result)

The Rule of 40 is the sum of growth and margin. If it is at least equal to the threshold (40), the company passes the rule and shows a healthy balance. Above the threshold plus 20 (that is 60) the result is excellent; between the threshold minus 10 and the threshold it is near and improvable; below, there is an imbalance: either growth is too low, or too much cash is burned. The calculator shows the Rule of 40 on both EBITDA and FCF, because the judgment can change depending on the measure.

The free cash flow version

The Rule of 40 on free cash flow uses the cash margin instead of the EBITDA one. It is generally more conservative, because free cash flow accounts for capital investments and changes in working capital, which EBITDA ignores. Many investors consider it the more reliable version, especially for companies with high investments or an EBITDA inflated by non-cash items. Comparing the two versions reveals how much the accounting profitability is backed by real cash.

The thresholds and interpretation

How to read the Rule of 40 result:

The threshold of 40 is conventional: some investors use 30 for smaller companies or 50 for very high quality ones.

Growth + margin combinations

Different paths to reach 40:

All these combinations pass the rule: high growth justifies negative margins, low growth requires high margins.

Growth vs profit profiles

Which profile your company matches:

The Rule of 40 assesses all three the same way: the sum counts, not the single strategy.

How to improve the Rule of 40

To raise the Rule of 40 you can act on both addends. On growth: increase acquisition, reduce churn, expand existing customers (upsell, cross-sell), enter new markets. On the margin: improve sales and marketing efficiency, raise prices, reduce service costs (gross margin), optimise the structure. The right lever depends on the stage: young companies push growth, mature ones the margin. The goal is their balance, not maximising just one.

The limits of the Rule of 40

The Rule of 40 is a shortcut, not a complete judgment. It does not distinguish between quality growth (loyal customers) and growth "bought" at a high price. It depends on the margin measure chosen: EBITDA, FCF, operating margin give different results. It does not consider absolute size, the market, retention (NRR) or capital structure. A threshold of 40 can be too low for leaders and too high for very young companies. It should be read together with other SaaS metrics, not alone.

Common mistakes

• Comparing companies using different margin measures (EBITDA vs FCF vs operating).
• Using single-quarter growth instead of annual.
• Applying the rule to SaaS that are too young, where growth dominates everything.
• Ignoring the quality of growth (retention, churn, NRR).
• Treating 40 as a rigid threshold instead of an indicative reference.

How to use the calculator

Enter current and prior revenue, EBITDA, free cash flow and the threshold. Read the growth, the margins and the Rule of 40 in both versions, and compare it with the threshold. Try different scenarios: more growth with less margin, or vice versa, and observe how the sum stays above 40 or not. It is the quickest way to assess the financial health of a SaaS from an investor's point of view, before raising capital or evaluating an acquisition.

Practical example

A SaaS company has €5,000,000 of current revenue, €3,500,000 the year before, €500,000 of EBITDA and €300,000 of free cash flow, with a threshold of 40. The result: a growth of 42.86%, an EBITDA margin of 10%, a Rule of 40 on EBITDA of 52.86%, a FCF margin of 6% and a Rule of 40 on FCF of 48.86%, with the verdict "passes the Rule of 40: healthy growth-profitability balance". The company passes the threshold in both versions: a solid profile. Enter your numbers for your real situation. The threshold of 40 is conventional and varies by stage and size; the choice of margin measure changes the result; it should be read with other metrics (NRR, CAC payback, burn). It is an informational estimate.

Frequently asked questions

What is the Rule of 40?

It is a rule for SaaS: the sum of the annual revenue growth rate and the profit margin should be at least 40. It indicates a healthy balance between growth and profitability.

How is the Rule of 40 calculated?

You add the percentage revenue growth and the percentage margin (EBITDA or free cash flow). Growth 43% + margin 10% = Rule of 40 of 53. If the sum is at least 40, the company passes the rule.

Why exactly 40?

The threshold of 40 is a convention emerged from observing successful SaaS: companies above 40 tend to create value sustainably. It is a reference, not a law: some use 30 or 50.

Which margin should I use, EBITDA or free cash flow?

Both are used. EBITDA measures operating profitability; free cash flow the real cash after investments, and is more conservative. This calculator shows both versions for a complete picture.

Can a loss-making company pass the Rule of 40?

Yes, if it grows enough. With a -20% margin you need 60% growth to reach 40. Young hyper-growth companies often pass the rule while losing money, because growth compensates the negative margin.

Does the Rule of 40 only apply to SaaS?

It was born for SaaS and software, where growth and recurring revenue are central, but the growth+margin principle also applies to other subscription or high-growth businesses. For SaaS it remains the most widespread.

Should I use annual or quarterly growth?

Annual (year over year). Quarterly growth is more volatile and should be annualised to be comparable with the annual margin. Using a single quarter distorts the result.

What does a result above 60 mean?

A result above 60 (that is threshold plus 20) indicates an excellent profile: the company combines growth and profitability at superior levels, typical of the best SaaS. It is rare and highly valued by investors.

Does the Rule of 40 consider retention?

Not directly. It captures growth and margin, but not the quality of growth. It should be read together with metrics like NRR (net revenue retention) and churn, which say whether growth is solid and lasting.

How can I improve my Rule of 40?

By increasing growth (more acquisition, less churn, upsell) or margin (more efficiency, higher prices, fewer costs). Young companies push growth, mature ones margin: the balance counts.

Is the Rule of 40 enough to value a company?

No. It is a useful but partial shortcut: it ignores size, market, retention, capital structure and quality of growth. It should be used with other metrics, not as the only judgment criterion.

Does it work for any country and currency?

Yes, the Rule of 40 is an international metric and the calculation is universal: use the values in your currency. Growth and margin are percentages, so the result does not depend on the currency.

Updated July 2026