The rule of 40

Investor

13 Dec 2025 — 1 min read

Foto: Alexander Eriksson

The Rule of 40 is a widely used performance benchmark for SaaS companies. It provides a balanced view of a company’s ability to combine growth with profitability.

Definition

A SaaS company is considered financially healthy when the sum of its revenue growth rate and profitability meets or exceeds 40 percent.

Formula

Revenue growth (%) + EBITDA margin (%) ≥ 40%

Rationale

The Rule of 40 acknowledges the inherent trade-off between growth and profitability:

High growth can justify lower or negative margins
Strong profitability can compensate for slower growth
Underperformance on both dimensions is a structural risk

Illustrative examples

50% growth and –10% EBITDA margin = 40% (acceptable)
30% growth and 15% EBITDA margin = 45% (strong)
20% growth and 5% EBITDA margin = 25% (weak)

Practical application

The Rule of 40 is commonly used by boards, management teams, and investors to:

Assess overall financial quality
Frame strategic discussions on growth versus efficiency
Benchmark performance against peers

Limitations

The Rule of 40 is a guideline, not a substitute for detailed analysis. Early-stage companies may reasonably fall below the threshold, while mature SaaS businesses are generally expected to meet or exceed it.

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