Rule of 40

Rule of 40 is a metric used to evaluate a company based on growth and profitability. Growth and margin can be added together to give an indication of a firm's performance.

The number "40" is based on the idea that an attractive SaaS/Cloud growth company should have a combined revenue growth and profit margin of at least 40. When using this rule, it is assumed that the company is in its growth stage and the payoff will be great in the future.

General Formula

Rule of 40 = Revenue Growth Rate + Profit Margin

Our Approach

A number of variations to the Rule of 40 exist. We use Free Cash Flow (FCF) Margin instead of Profit or Operating Margin on Valuations.cloud. This has shown to perform better than the alternatives.

Growth-Margin Trade-off

A company can sacrifice margin to create growth and vice versa. Because of this, it's generally best to see a balance between the two. However, a company early in its growth stage will prioritize revenue growth over FCF Margin.