R40Rule of 40
A benchmark for software and high-growth companies that combines revenue growth with profitability. A score of 40 or above is considered healthy.
Formula
How to Interpret
A score ≥ 40 means the company has a strong balance of growth and profitability. A fast-growing company can afford lower margins, while a slower-growing one needs higher margins to compensate. Scores below 40 suggest the company may be burning cash without sufficient growth to justify it.
Why It Matters
The Rule of 40 is the single best quick-check for SaaS and high-growth companies. It forces a trade-off: growth or margins — you need enough of at least one. Companies consistently above 40 tend to create significant shareholder value.
Example
A company growing revenue at 25% YoY with a 20% FCF margin scores 45 — passing. A company growing at 10% with a 5% margin scores 15 — failing.