Rule of 40 Calculator
Whether growth and profitability together clear the forty-point bar investors use as a shorthand.
The rule of 40 says a healthy subscription business should have its growth rate plus its profit margin sum to at least 40.
How the rule of 40 calculator works
The rule of 40 says a healthy subscription business should have its growth rate plus its profit margin sum to at least 40. Growing 60% while losing 20% of revenue passes; growing 15% at a 10% margin does not.
It exists because the two are tradeable. A company can buy growth by spending its margin, or harvest margin by slowing growth, and the rule scores the combination rather than either alone.
It is a heuristic, not a law. It suits companies above roughly 10 million in revenue; below that, growth rates are volatile enough that the score bounces around meaninglessly. Which margin you use also matters — EBITDA, free cash flow and operating margin give different scores from the same company.
Formula: score = revenue growth % + profit margin %
Worked examples
| Inputs | Rule of 40 score | Note |
|---|---|---|
| 41% growth at a −5% margin | 36.18 | score 36.2 — close |
| Slower but profitable | 40 | score 40 — passes |
| Neither growing nor profitable | -5.65 | well below |
FAQFrequently asked questions
What is the rule of 40?
Revenue growth percentage plus profit margin percentage should total at least 40.
Which profit measure should I use?
EBITDA margin and free cash flow margin are both common and give different scores. State which you used.
Does it apply to small companies?
Not well. Below roughly 10 million in revenue, growth rates swing too much for the score to mean anything.
Can a loss-making company pass?
Yes — that is the point. Growing 60% while losing 20% of revenue scores 40.
Is 40 a real threshold?
It is a convention from growth-equity investing, not a finding. It is useful shorthand and nothing more.
Where these figures come from
- Reichheld (2003), Harvard Business Review — The One Number You Need to Grow — the paper that introduced Net Promoter Score
- Australian Securities and Investments Commission — the Australian corporate regulator
Last checked: September 2026. These are the industry-standard definitions; where companies commonly disagree, the page says so.