Rule of 40 Calculator
Calculate your Rule of 40 score across all three common definitions (EBITDA margin, free cash flow margin, and operating margin) because which one a board uses changes the answer by several points.
How do I calculate the Rule of 40?
Add your revenue growth rate to your profit margin, both as percentages. A company growing 30% with a 15% margin scores 45 and clears the rule. The complication is that there is no single agreed profitability measure: EBITDA margin, free cash flow margin, and operating margin produce meaningfully different scores from identical financials, and the definition being used is rarely stated alongside the number.
How to use this tool
- 1
Enter growth
Year-over-year revenue growth for the period you are reporting.
- 2
Enter all three margins
EBITDA, free cash flow, and operating margin: leave any blank and it is skipped.
- 3
Compare the three scores
See each definition's score side by side, so you know which one you are quoting and how far apart they are.
Which margin you pick can move the score ten points
The Rule of 40 is treated as a standard and is not one. Four things determine whether your score is comparable to anyone else's.
Three definitions, three answers
EBITDA margin is the most generous, free cash flow margin the most conservative, and operating margin sits between. A company can clear 40 on one and miss on another in the same quarter with no change to the underlying business.
Adjusted EBITDA is discretionary
Add-backs vary widely between companies and are rarely disclosed in full. Two businesses reporting identical adjusted EBITDA margins can have very different underlying performance.
It breaks at small scale
A company growing 200% off a small base scores well regardless of profitability, and the score says almost nothing. The rule is most meaningful past roughly $10M of revenue, where growth rates have moderated into a comparable range.
It is a snapshot, not a trend
A score of 42 that fell from 58 is a different story from a 42 that rose from 30. The direction carries more information than the level, and a single quarter's figure carries very little at all.
Numbers to sanity-check against
The Rule of 40 is a widely used heuristic from software investing, not an accounting standard. Treat it as a conversation starter rather than a target to manage toward.
A score is not a strategy
Knowing you score 38 does not tell you whether to buy growth or margin. That decision needs the marginal economics: what the next dollar of sales spend actually returns, which channels still have room, and where in the cost base margin could come from without slowing growth. That is a decomposition across cohort, channel, and cost-centre data, and it is a different question every quarter.
See how DataWyse answers thisQuestions finance teams ask about this tool
What is the Rule of 40?
A heuristic from software investing which holds that a healthy company's revenue growth rate plus its profit margin should total at least 40. It captures the trade-off between growth and profitability in a single number: a company can grow fast and lose money, or grow slowly and be profitable, and both can clear the bar.
Which profit margin should the Rule of 40 use?
There is no single agreed answer, which is the main weakness of the metric. EBITDA margin is most commonly used and most generous. Free cash flow margin is the most conservative and arguably the most honest. State which one you are using whenever you quote the score.
Does the Rule of 40 apply to non-SaaS businesses?
It was developed for subscription software, where revenue is recurring and gross margins are high. Applying it to a business with different economics (services, hardware, marketplaces) produces a number without a meaningful benchmark behind it.
Is a score above 40 always good?
Not necessarily. A very high score driven entirely by margin with minimal growth may indicate underinvestment. The composition matters as much as the total, and investors will always ask which half of the number is doing the work.
Is this tool really free?
Yes. No signup, no email required, no usage limit. It runs entirely in your browser: nothing you type is uploaded to a server or stored anywhere. We build these because the people who find them useful are the people who eventually need a financial analyst that works the same way.
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