Rule of 40

Definition:

The Rule of 40 is a simple formula used to evaluate the health of a Software as a Service (SaaS) company by combining its revenue growth rate and profitability.

Ideally, this number should be 40% or higher for a SaaS company to be considered healthy.

 

Formula:

The formula is: Rule of 40 = Recurring Revenue Growth Rate (%) + EBITDA Margin (%).