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Free operating metric
Rule of 40 Calculator
Combine revenue growth and margin, compare scenarios, and see the operating quadrant behind the score.
Educational operating metric only. Not investment advice.
Base Rule of 40 score
42.0
Score 42.0 clears the bar mainly on growth. Watch EBITDA margin durability.
Base quadrant
growth led
Alternative score
44.0
Score delta
+2.0 pts
Distance to 40
2.0 pts
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Start 10-minute demoThe diagonal is the Rule of 40. Points above it pass. Points below it do not.
| Scenario | Growth | Margin | Score | Quadrant |
|---|---|---|---|---|
| Base | 30% | 12% | 42 | growth led |
| Alternative | 24% | 20% | 44 | growth and profit |
Worked example: two paths to 40
Same company, two operating plans, one year apart. Round percentages so the trade-off is visible.
- Base growth
- 22%
- Base EBITDA margin
- 12%
- Plan growth
- 15%
- Plan EBITDA margin
- 25%
Assumptions
- 1
Base score
22 + 12 = 34
- 2
Plan score
15 + 25 = 40
- 3
Score delta
40 - 34 = 6 points
- 4
Read the mix
Growth -7 points, margin +13 points
The plan clears 40, but it buys 13 points of margin with 7 points of growth. Ask whether the lost growth is recoverable before treating the higher score as a better business.
Method
The Rule of 40 adds annual revenue growth to a profitability margin. It is a compact way to discuss the trade-off between investing for growth and producing cash. This calculator supports either EBITDA margin or free cash flow margin because the right measure depends on the company and the decision being made.
Enter the base case and an alternative case. The score is growth plus margin, including negative values when a business is shrinking or investing ahead of profitability. The quadrant is a conversation aid, not a valuation formula. A company can clear 40 through growth, through margin, or with a balanced contribution from both.
1. Choose a margin basis
Use EBITDA or free cash flow consistently for both scenarios.
2. Enter growth and margin
Negative percentages are valid and should not be hidden.
3. Compare scenarios
Review the score delta and the quadrant each scenario occupies.
The Rule of 40 is most useful when it is read as a starting point for diligence. Revenue quality matters: recurring revenue, retention, concentration, pricing, and the durability of growth all change what a point of growth is worth. Margin quality matters too. EBITDA can be helpful for comparability, while free cash flow is often more revealing for businesses with heavy capital needs or working capital swings. A negative margin may be justified when customer acquisition returns are demonstrably strong, but it should be paired with a credible path to operating leverage. Compare base and alternative cases to make the trade-off explicit. Growth-led clears of 40 deserve questions about sales efficiency and payback. Profit-led clears deserve questions about whether the business can reaccelerate without destroying margin. Rebuild cases need a sequenced plan, not a single optimistic assumption. This tool does not determine a company value, and it cannot replace a full cohort, cash flow, or market analysis. Use it to frame the conversation, then pressure-test the drivers in a full PE workspace.
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Educational operating metric only. Not investment advice.