Metrics
Rule of 40
The Rule of 40 is a SaaS benchmark stating that a healthy company's revenue growth rate (as a percentage) plus its profit margin (typically measured as EBITDA or free cash flow margin) should sum to 40% or more.
The rule is deliberately a rough screen, not a precise valuation model: it allows a fast-growing, unprofitable company and a slower-growing, highly profitable one to both be judged "healthy" at the same combined score, reflecting the real trade-off investors accept between growth and margin at different company stages.
It is most useful as a trend indicator over time rather than a single-period pass/fail test — a company whose combined score is declining quarter over quarter is worth more scrutiny than its absolute score in any one period.
Example
A company growing revenue 60% year over year with a −15% margin scores 45 and passes; a company growing 15% with a −10% margin scores 5 and does not.