Rule of 40
Check whether a growth company clears the Rule of 40 — that revenue growth plus profit margin sum to at least 40% — and see how growth and profitability trade off against each other.
Runs entirely in your browserRuns entirely on your device — nothing you type is sent anywhere. Educational only, and not investment advice.
How to use this calculator
Each step names a control you will find on screen above.
- Revenue growth
The year-on-year revenue growth rate as a percentage.
- Profit margin
A consistent margin — usually EBITDA or free-cash-flow margin — as a percentage. Use the same definition whenever you compare companies.
- Read the score
The two are added; a sum of 40% or more clears the bar. A company can pass on growth alone, profitability alone, or a balance of both.
Worked example: A balanced growth company
Revenue growing 30% a year at a 15% profit margin.
What to enter
- Revenue growth
- 30%
- Profit margin
- 15%
What it shows you
- Rule of 40 score
- 45%
- The bar
- 40%
- Verdict
- Clears it
- Best for
- Software / new-age firms
Where this is taught
A calculator gives you a number. These explain what the number means and when it misleads you.
- Fundamental Analysis9 minThe Rule of 40: growth and profit, on one lineA one-line test for growth companies: revenue growth plus profit margin should clear 40%. Where it came from, why it captures a real trade-off, and the traps in applying it.
- Fundamental Analysis12 minBusiness models and unit economicsBefore any ratio: how does this company actually make money, does each sale make sense, and what happens to profit when revenue doubles?
- Fundamental Analysis11 minGrowth, value and quality: three ways to be rightThree coherent philosophies, what each one is actually betting on, how each fails, and why mixing them randomly is the worst option.