Rule of 40

Also called: rule of forty, saas

A health check for software and fast-growing tech companies: revenue growth plus free cash flow margin should add up to at least 40.

Formula

Rule of 40 = Revenue growth % + Free cash flow margin %

Worked example

1. Growing 25% with a 20% free cash flow margin: 25 + 20 = 45

Result: 45 (passes)

How to read it

It lets a company trade growth for profit: 40% growth with no profit or 10% growth with 30% margins both pass.

See it with real numbers: Tech company pages → (free account)