Rule of 40 Calculator
Growth rate + profit margin should total at least 40%, the classic SaaS balance test. Enter your two numbers to get your score and verdict, and switch the threshold to test yourself against the stricter Rule of 50 or your own Rule of X.
Your numbers
EBITDA margin is the practical default for private SaaS. Institutional investors prefer FCF margin, it's harder to game.
Healthy ≥ 40 · strong ≥ 50 (top quartile) · elite ≥ 60. Only about a third of SaaS companies clear 40 in a typical year (KeyBanc, 2023). The old 40 bar is increasingly cited as a "Rule of 50" for top-tier companies, switch the threshold above to test yourself against it.
The Rule of 40 formula
Rule of 40 = YoY revenue growth rate (%) + profitability margin (%). A score of 40 or higher signals a SaaS business that balances growth and profitability well. You can clear it three ways: grow fast at a loss, grow modestly while highly profitable, or anything in between. A company growing 25% with a 20% EBITDA margin scores 45, it passes. One growing 20% while burning 15% scores 5, it fails.
Which profit margin should you use?
The growth input is settled, year-over-year ARR (or recurring revenue) growth. The profit input is where it gets debated, and your choice materially changes the score:
- EBITDA margin, the practical default for private SaaS. Easy to compute and widely reported, but can be flattered by adjustments.
- Free cash flow (FCF) margin, favoured by many institutional investors because it reflects real cash generation and is hardest to game.
- Operating or net margin, stricter, GAAP-based alternatives used for cross-sector comparison.
Pick one and stay consistent over time, switching between EBITDA and FCF will rank the same company differently, especially if it's capital-intensive.
What's a good Rule of 40 score?
40+ is healthy; 50+ is top-quartile; 60+ is elite (top-decile). Context matters, though: the median SaaS company scores around 35 (KeyBanc, 2025), and only about a third clear 40 in a typical year, yet those that do command markedly higher valuation multiples (Bessemer, 2024). The metric is most meaningful from Series B onward; at seed and Series A, focus on unit economics (CAC, LTV, gross margin, net retention) instead, since high growth with deeply negative margins can "pass" while masking weak fundamentals.
Rule of 40 vs Rule of 50 vs Rule of X
As more SaaS companies clear 40, investors increasingly talk about a Rule of 50, the same growth-plus-margin sum, but with the bar raised to 50 to separate genuinely top-tier operators from the merely healthy. The broader idea is sometimes generalised as the Rule of X: pick the threshold that fits your stage, segment and the market's current appetite for growth versus profitability. In a growth-friendly market the effective bar sits lower; when capital is expensive and efficiency is prized, it climbs.
The formula never changes, it's always growth% + margin%. Only the pass line moves. Use the threshold switch in the calculator above to test your score against 40, 50, or a custom target, and see how much extra growth or margin you'd need to clear the higher bar.
Plan the whole picture in Adlega
Adlega turns these one-off numbers into a live financial model for your SaaS, projections, scenarios, dashboards.