Your score is 42, which clears the bar by 2 points. The Rule of 40 says a healthy SaaS keeps growth plus profit margin at or above 40, so strong growth can justify thin or negative margins, and high margins can offset slower growth.
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The Rule of 40 is a quick health check for software companies: add your revenue growth rate to your profit margin, and a healthy business lands at 40 or higher. A company growing 30% a year with a 12% margin scores 42 and passes. The calculator above runs that math the moment you change either number, and tells you how far above or below the line you sit.
The Rule of 40 is a benchmark that combines growth and profitability into a single number. The formula is plain: revenue growth rate plus profit margin, both as percentages. If the total is 40 or more, the company is considered to be balancing the two well. If it sits below 40, the business is either growing too slowly for its margin or burning too much cash for its growth rate. Venture investors and SaaS operators lean on it because a fast-growing company that loses money and a slow, highly profitable company can produce the same score, and the framework treats both as acceptable as long as the sum holds.
Take your year-over-year revenue growth rate first. Then pick a margin and stay consistent: EBITDA margin or free cash flow margin both work better than net income, because they avoid the accounting noise that makes early SaaS companies look worse than they are. Add the two. Say you grow 22% and run a free cash flow margin of 25%; your score is 47, comfortably above the line. A company growing 80% with a negative 35% margin still scores 45, which passes, because aggressive growth is paying for the burn. The same negative margin paired with 20% growth scores a failing negative 15, the classic sign of spending that growth no longer justifies.
Investors like the Rule of 40 because it refuses to let a company hide a weak side of the business. You can grow fast and burn cash, or grow slower and bank profit, but you should not do both poorly. Companies that clear 40 consistently tend to command higher revenue multiples, since the score is evidence that growth is not coming at an unsustainable cost. It is a screening signal rather than a full verdict, and it works best once a company has real revenue behind it. If your organic growth engine is what is meant to drive that top-line number, a free SEO audit will show you where the efficient, compounding demand is hiding.
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