Method and assumptions
Rule of 40 is a heuristic for mature SaaS businesses, not a universal valuation rule. Choose the same growth and profit definitions every period.
Rule of 40 score = revenue growth rate + profit margin.
Worked scenario
Select a consistent twelve-month revenue growth measure and profitability measure, such as EBITDA margin or free-cash-flow margin. Calculate the sum, then show the two components separately. Run the same definitions across periods and compare with cash runway and gross margin.
How to interpret the result
The Rule of 40 is a portfolio-level trade-off indicator, not a universal target or valuation formula. Two companies can have the same score with very different growth quality, margins and cash risk. Use it as a summary after examining retention, gross margin and capital efficiency.
Input reference
- Revenue growth rate
- Example default: 35%
- Profit or free-cash-flow margin
- Example default: 12%
Common mistakes
- Mixing a quarterly growth rate with an annual margin.
- Switching between EBITDA and cash-flow margin silently.
- Treating 40 as proof of business quality.
Before using the result
- Document the period and profitability definition.
- Show growth and margin beside the combined score.
- Review retention, gross margin and runway separately.
Questions to check before deciding
Which profit margin should I use?
Use a consistently defined operating or free-cash-flow margin and label it clearly.
Is 40 a valuation guarantee?
No. It is a heuristic that should be considered alongside retention, market and cash position.
Independent planning calculator. Not financial, tax, legal or investment advice.