Growth and profitability describe different demands on a business.
The Rule of 40 adds a growth percentage to a profit-margin percentage as a rough way to discuss the balance between expansion and profitability in SaaS. It is a heuristic, not a valuation formula or a guarantee of financial health.
Different practitioners use EBITDA, operating profit or free cash flow. This calculator chooses EBITDA margin and labels it explicitly. Results using another profit definition are not directly interchangeable.
The formula, made clear.
- Growth
- Annual revenue change measured against the prior comparable year.
- EBITDA margin
- EBITDA divided by recognized revenue, expressed as a percentage.
Put the numbers in context.
35% year-over-year growth plus a −10% EBITDA margin gives a score of 25%, which is 15 percentage points below 40%.
| Input | Example value |
|---|---|
| Year-over-year revenue growth | 35% |
| EBITDA margin | -10% |
| Growth plus EBITDA margin | 25% |
What this calculation assumes
EBITDA-margin convention; annual comparable periods. The 40% reference is contextual and most relevant to businesses with established revenue. EBITDA does not equal cash flow.
Methodology references
What to consider next.
Inspect cash burn, retention and gross margins rather than optimizing only this sum.
How we approach financial models →