What Is the Rule of 40?
Growth rate plus profit margin should total at least 40%. Enter both and see your score, and which of the two levers is carrying it.
- Free, no sign-up
- Nothing is stored
- EBITDA or free cash flow
- Instant score
One number for growth and profitability together
Growth rate plus profit margin. If the two add up to 40 or more, the business is considered healthy — fast growth excuses losses, and profitability excuses slow growth, but neither excuses both.
Enter your growth rate and your margin and read the score, plus what it actually implies.
Reading the score
The number is simple. What it means depends entirely on which half is carrying it, and that is the part the figure alone hides.
- Above 40 — healthy. The mix of growth and margin is defensible.
- 30 to 40 — workable, and worth knowing which side is weak.
- Below 30 — neither fast enough nor profitable enough, which is the hardest position to raise against.
55% growth, -12% EBITDA margin
Growth is paying for the losses here. At 30% growth the same margin scores 18.
Which half is carrying it
Two companies can score 43 and be in completely different situations. The score is a summary, and summaries hide the thing you most need to know.
- Growth-led scores depend on the growth continuing. If it slows, the score collapses because the margin cannot catch it.
- Margin-led scores are more durable but raise a different question: why is growth slow if the unit economics work?
- Investors read the composition, not just the total.
Which margin to use
The rule is usually quoted with EBITDA margin, but free cash flow margin is the stricter and often more honest version. Pick one and stay with it.
- EBITDA margin is the common convention and the easier number to hit.
- Free cash flow margin is harder and more revealing, especially where there is heavy capitalised development spend.
- Use year-on-year revenue growth, not month-on-month annualised — annualising a good month flatters the score badly.
- 1Revenue growth, year on yearNot an annualised good month.
- 2Pick your margin basisEBITDA or free cash flow.
- 3Add them togetherNegative margins subtract.
What the rule does not tell you
It is a quick sanity check, not a verdict. It was coined for mature SaaS at scale, and applying it to a very early company produces a number that is technically correct and not very meaningful.
- It says nothing about retention, which decides whether the growth is worth anything.
- It says nothing about how the growth was bought — a 55% growth rate funded by an unsustainable CAC still scores well.
- Below roughly $1M ARR the percentages swing so hard that the score is noise.
Four numbers worth keeping
Why Parix.ai gives this away
We build SaaS products, and this is the first number anyone looks at when the deck opens. Knowing which half is carrying your score is worth more than the score. These tools are how people find us, which is why there is no paywall.
Work out my scoreWho uses it
Founders preparing a raise, operators tracking whether a push for growth is costing more than it returns, and investors reading a business quickly from the outside.
The numbers underneath it
Growth is only as good as retention, so check the Churn Rate Calculator and the LTV:CAC Ratio before trusting a high score. The MRR / ARR Calculator gives you the growth input.
When the score is the symptom
A weak score is usually a retention or pricing problem rather than a growth one. Our product team works on that end of it.