Finance calculator
Rule of 40 Calculator
The Rule of 40 says a healthy software business should have a growth rate plus profit margin of at least 40%. This calculator adds your revenue growth rate and your profit (or free-cash-flow) margin and checks the result against the 40 benchmark. It's a quick health signal, not a complete valuation.
How to use this calculator
- Enter your year-over-year revenue growth rate as a percentage.
- Enter your profit margin (operating, EBITDA, or free-cash-flow — use one consistently).
- Read your Rule of 40 score and whether it clears 40%.
Formula
- Rule of 40 score = revenue growth rate (%) + profit margin (%)
- Healthy if the score is 40% or higher.
Example calculation
A company growing 30% a year with a 15% profit margin scores 45 — comfortably above the Rule of 40 benchmark.
How to interpret the results
- A score of 40 or higher is considered healthy: strong growth can justify thin margins, and strong margins can justify slower growth.
- Be consistent about which margin you use (operating, EBITDA, or FCF) so the score is comparable over time.
- It's a sanity check, not a target to game — sacrificing durable growth for a one-time margin bump can still hurt long-term.
Frequently asked questions
What is the Rule of 40?
It's a SaaS benchmark stating that a company's revenue growth rate plus its profit margin should be at least 40%. It balances growth against profitability.
Which profit margin should I use?
Operating margin, EBITDA margin, or free-cash-flow margin are all used — the key is to pick one and apply it consistently. FCF margin is common for later-stage companies.
Is a higher Rule of 40 score always better?
Generally yes, but context matters. A score driven by durable growth or sustainable margin is stronger than one inflated by a one-off cost cut or an unsustainable growth spurt.
Planning disclaimer
MoneyHackWise calculators are for general informational and planning purposes only and do not provide financial, investment, tax, legal, accounting, lending, or business advice. Results are estimates based on the inputs and assumptions shown.