Rule of 40 score calculator.
The rule of 40 adds revenue growth and profit margin, both in percent, and reads a total of 40 or more as a healthy balance of growth and profitability. Revenue growing from $7 million to $10 million is 42.9% growth; with a -15% margin, the score is 27.9, about 12 points short of 40.
Rule of 40 score
27.86
- Revenue growth
- 42.9%
- Points short of 40
- 12.14
Indicative result from the numbers you enter. Not financial, tax or legal advice.
How it is calculated.
- Revenue growth = (revenue this year - revenue last year) / revenue last year x 100.
- Score = revenue growth + profit margin.
- Gap = 40 - score, shown as zero once the score reaches 40.
Worked example.
$7M to $10M with a -15% margin
| Step | Working |
|---|---|
| Revenue growth | ($10,000,000 - $7,000,000) / $7,000,000 = 42.9% |
| Score | 42.86 + (-15) = 27.9 |
| Gap to 40 | 40 - 27.86 = 12.1 points |
What the score shows.
The rule lets a company trade growth for profit and still pass: 60% growth with a -20% margin scores 40, and so does 10% growth with a 30% margin. Investors use it to judge whether losses are buying enough growth.
When it applies.
The rule is mainly applied to software companies with revenue in the tens of millions or more. Very early startups often grow fast from a small base and post deep losses, so the score swings widely and says little. Below a few million in revenue, burn multiple and payback usually tell investors more.
Which margin to use.
EBITDA margin and free cash flow margin are both common, and they can differ a lot for a company that capitalizes software or collects annual contracts upfront. Pick one, label it, and use it every time you report the score.
Common mistakes.
- Mixing a quarterly growth rate with an annual margin.
- Switching between EBITDA and cash flow margin from one report to the next.
- Using bookings growth instead of recognized revenue growth.
- Leaning on the score at a stage where the base is too small for it to mean much.