Rule of 40 Calculator

Add growth rate to profit margin and test the result against the 40 per cent software benchmark.

About Rule of 40 Calculator

The rule treats growth and profitability as interchangeable: a business growing 40% while break-even scores the same as one growing 10% at a 30% margin. It is a screen for whether losses are buying enough growth to justify them. It is the most widely used single test of software company quality, and falling below 40 is what triggers pressure to trade growth for margin.

Formula

Rule of 40

Rule of 40 score = revenue growth % + profit margin %

growth: Year-on-year revenue growth
margin: EBITDA or free cash flow margin

Worked example

With the default values below, Rule of 40 Calculator returns Rule of 40 Score of 44.00. Change any input above and every figure here is recalculated in your browser.

Inputs used

Year-on-year revenue growthaccepts 0–100 %: 32 %
EBITDA or free cash flow marginaccepts 0–100 %: 12 %

Results

Rule of 40 Score: 44.00
Verdict: Passes the Rule of 40 with 4 points to spare

Step by step

1Values used
2Rule of 40
3Rule of 40 Score= 44.00
4Verdict= Passes the Rule of 40 with 4 points to spare

Assumptions and limits

The result is derived only from the 2 inputs listed above. Anything not among them is not part of the calculation.
In particular, this calculator does not take inflation, tax, fees or charges or compounding frequency into account.
Figures are rounded for display to 2 decimal places, so totals built from several rounded parts can differ slightly from the unrounded arithmetic.
This is an estimate for general information and not professional financial, tax or legal advice. See the full disclaimer for the limits that apply to this kind of calculator.

How these calculators are built and tested is described on the Methodology page. If a figure looks wrong, please report it.

Frequently Asked Questions

How is Rule of 40 calculated?

Rule of 40 score = revenue growth % + profit margin % The rule treats growth and profitability as interchangeable: a business growing 40% while break-even scores the same as one growing 10% at a 30% margin. It is a screen for whether losses are buying enough growth to justify them.

Why does Rule of 40 matter?

It is the most widely used single test of software company quality, and falling below 40 is what triggers pressure to trade growth for margin.

What values do I need to enter?

This calculator takes 2 inputs: Year-on-year revenue growth, EBITDA or free cash flow margin. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.