Rule of 40 Calculator

How it is calculated

The score is a plain sum of two percentages entered as whole numbers: score = revenue growth % + profit margin %. The gap is score − 40, so a positive gap is the cushion above the threshold and a negative one is how far you fall short. The status reads Pass when the score is 40 or higher, and 40.00 exactly counts as a pass. Either input can be negative, since a shrinking company or one with a loss is a normal case, and the results are shown to two decimals. The tool does not say which growth period or which margin type (EBITDA, operating or free cash flow) to use, so you must use the same definitions every time you compare.

Common mistakes

• Entering percentages as decimals, such as 0.35 and 0.08. The fields expect 35 and 8, and the decimal entries give a score of 0.43 and a Below 40 verdict.
• Entering a loss as a positive number. A company with a −20% margin must be entered with the minus sign, otherwise the score is overstated by 40 points.
• Mixing definitions between companies. One firm's growth may be year over year and another's quarterly annualised, and one margin may be EBITDA while another is free cash flow, so scores are not comparable.
• Reading a pass as proof of health. A 40.00 score from 60% growth and a −20% margin passes the test but burns cash, so look at the two inputs and not only the sum.
• Applying the rule to businesses it was not made for. The score is meant for software and subscription companies, and the tool gives a number for any inputs.