Rule of 40 Calculator
The Rule of 40 is the most widely used single-number health check for SaaS companies. It combines revenue growth rate and profit margin into one score, recognizing that both growth and profitability have value and that companies can trade one for the other. A company growing at 50% per year with a -10% margin scores 40, the same as a company growing at 20% with a 20% margin. The rule gives investors and operators a simple framework to evaluate whether the current growth and profitability balance is sustainable. This calculator lets you input ARR or revenue growth rate and your choice of profit margin metric to instantly see your score and whether you pass or fall short of the 40 threshold.
Rule of 40 formula
Rule of 40 Score = ARR Growth Rate (%) + Profit Margin (%)
Pass: Score >= 40 | Fail: Score < 40
Score interpretation
- Below 20: warning - revisit growth strategy or cost structure urgently.
- 20 to 39: developing - approaching benchmark but not yet sustainable.
- 40 to 59: healthy - meets the investor benchmark for balanced SaaS.
- 60+: exceptional - top-quartile SaaS performance.
Rule of 40: frequently asked questions
What is the Rule of 40?
The Rule of 40 states that a healthy SaaS company's revenue growth rate plus its profit margin should equal or exceed 40%. A score of 40 or above indicates a balanced and sustainable business.
Which profit margin should I use?
Most practitioners use EBITDA margin or free cash flow margin. Some use operating profit margin. EBITDA margin is most common for private companies; free cash flow margin is preferred for public SaaS.
Can a company pass the Rule of 40 with negative profit?
Yes. A company growing at 60% ARR with a -15% operating margin scores 45, passing the Rule of 40. The trade-off between growth and profitability is the core concept.
At what stage does the Rule of 40 apply?
The Rule of 40 is most relevant for companies with $10 million or more in ARR. Very early-stage companies often sacrifice all margin for growth, making the rule less meaningful.
What is a great Rule of 40 score?
A score of 40 is the benchmark floor. Scores of 60 or above are exceptional. Top-performing public SaaS companies like Veeva and Paycom have historically scored above 60.
Sources
- U.S. Securities and Exchange Commission: EDGAR Company Filings.
- U.S. Small Business Administration: Manage Your Finances.
Reviewed by the CalculatorHub team, edited by James Graham, 14 June 2026. See our methodology.