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Rule of 40 (SaaS & Tech Growth) Calculator Formula Breakdown
Trailing 12-month year-over-year revenue growth rate.
Organic cash generation relative to total sales: (Free Cash Flow / Revenue) × 100.
A score of 40%+ indicating top-quartile software unit economics and financial health.
Categorization from Elite (>50%), Outperformer (40%-50%), Balanced (25%-40%), to Underperformer (<25%).
How to Calculate Rule of 40 Screener Step-by-Step
Extract trailing twelve-month revenue, annual revenue growth, and operating cash flows from SEC 10-K/10-Q filings.
Calculate true Free Cash Flow by deducting capital expenditures from operating cash flow.
Compute Free Cash Flow Margin % = (Free Cash Flow / Revenue) × 100.
Add Revenue Growth Rate % to Free Cash Flow Margin % to obtain the combined Rule of 40 score.
Benchmark against institutional software percentiles: Elite Outperformer (50%+), Target (40%+), or Burning Capital (<25%).
How to Interpret the Result
Frequently Asked Questions
What is the Rule of 40 in SaaS?
Popularized by Silicon Valley venture capitalists and Bain & Company, the Rule of 40 states that a healthy software company's growth rate plus its profit margin should equal or exceed 40%.
Can a slow-growing company beat the Rule of 40?
Yes! A mature tech company growing revenue at only 10% can beat the Rule of 40 if its Free Cash Flow margin is 30% or higher (10% + 30% = 40%).
Why use FCF Margin instead of EBITDA Margin in Rule of 40?
Free Cash Flow accounts for capitalized software R&D, working capital movements, and taxes, providing a much cleaner view of real cash economics than accounting EBITDA.
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