Rule of 40 Calculator

The score prices the trade between growth and profitability. A fast-growing money-loser and a slow-growing cash machine can both pass, and investors read anything at or above 40 as a healthy balance either way. Younger companies lean on the growth term while mature ones lean on margin, so as growth slows, margin should be rising to meet it. Pick one margin measure and keep it every period, or the score stops being comparable.

With revenue and expenses in a Ferra table, growth and margin are one plain-English question away, and the score moves as each month's numbers land.

Addition, nothing fancier. Enter year-over-year revenue growth and profit margin as percentages; the calculator sums them and checks the total against 40, the threshold investors use to judge how a software company balances growth against profitability.

Growth rate plus profit margin, both covering the same period, typically the trailing twelve months, and either one can be negative. There's no weighting; a point of growth counts exactly as much as a point of margin.

Take a company that grew ARR from $16 million to $20 million over the past year: a $4 million increase on a $16 million base, or 25% growth. Over the same period it produced $2 million of EBITDA on $20 million of revenue, a 10% margin. Its score: 25 + 10 = 35, a few points short of the bar.

Cherry-picked margins are how this score gets gamed. Gross margin pushes almost any software company past 40 and reveals nothing, the rule only works with a bottom-line measure like EBITDA or free cash flow margin. The second failure is mixing periods: trailing-twelve-month growth against a single quarter's margin, or one input annualized and the other not.

At or above 40 reads as healthy, and sustained scores above 50 put a company among the best performers. Public SaaS companies that clear 40 consistently tend to command higher revenue multiples: that's why the rule keeps showing up in board decks and investor memos.

How you reach 40 matters less than reaching it. A company growing 80% while burning cash and one growing 10% at a 30% margin both clear the bar; the rule allows that trade deliberately. A score well below 40 says growth isn't efficient enough to justify the burn, or that a profitable company has stopped growing. Very early-stage companies routinely score under 40 while investing ahead of revenue: the rule carries real weight once a company reaches meaningful scale.

The score is a sum, so either term moves it, but the best levers lift growth and margin at the same time.