Growth & SaaS metrics

Rule of 40 calculator for software and services

The Rule of 40 says growth rate plus profit margin should exceed 40. It gives investors one number that treats a fast, loss-making business and a slow, cash-generative one as comparable.

Inputs

Result

Rule of 40 score

33.89

Revenue growth
38.89%
Profit margin
-5%
Verdict
Below the benchmark
Margin needed to reach 40
1.11%
Growth needed to reach 40
45%
Revenue added
USD 1,400,000
  • State whether the margin is EBITDA or free cash flow whenever you quote the score externally.

How to use this calculator

  1. 1Enter revenue for the current and prior period.
  2. 2Enter EBITDA or free cash flow for the current period.
  3. 3Read the combined score and the margin or growth needed to reach 40.

How the score is read

A company growing 60% at a −15% margin scores 45 and passes. One growing 10% at a 25% margin scores 35 and does not. The rule deliberately allows profit to be traded for growth, but not indefinitely.

Use EBITDA margin for established businesses and free cash flow margin where working capital swings are large. Be explicit about which you used — the two can differ by 15 points.

Where the rule breaks down

Below roughly 1m of revenue the score is noise: percentage growth is trivial to achieve from a small base. It also flatters businesses that cut marketing to buy short-term margin at the cost of next year's growth.

Treat it as a screening metric alongside retention and payback, not as a valuation method on its own.

Call this tool from the API

Every calculator on this site is also an endpoint. Get a free key from the developer page and call it from your product, spreadsheet or AI agent.

curl -X POST https://utopiavalue.co/api/v1/tools/rule-of-40-calculator \
  -H "Authorization: Bearer $UTOPIA_API_KEY" \
  -H "Content-Type: application/json" \
  -d '{"currentRevenue":5000000,"priorRevenue":3600000,"ebitda":-250000,"currency":"USD"}'

Frequently asked questions

Does the Rule of 40 apply outside software?

It is most meaningful for recurring-revenue businesses. Project-based or cyclical businesses need normalised multi-year figures for the score to mean anything.

Should I use ARR or reported revenue?

Use whichever you report consistently. ARR growth is usually higher than recognised revenue growth, so mixing them inflates the score.

What score do buyers want?

40 or above is the pass mark; sustained scores above 50 attract premium multiples, while sub-20 scores usually compress them.