SaaS Rule of 40 Calculator

Quickly calculate the Rule of 40 for your SaaS company, using its ARR Growth Rate and EBITDA Margin.

If your company displayed an recurring revenue growth of 25% and EBITDA margin of 33%, your Rule of 40 score is 58%.

The popular Rule of 40 principle states that, at scale, the combined growth rate and profit margin of a SaaS business should be equal to or larger than 40%.

The calculation is straightforward: the revenue growth rate is added to the EBITDA margin for a given time period (usually a year). By tying growth to a measure of profitability, namely the EBITDA margin, the Rule of 40 captures one business' operational efficiency, offering a better balance between revenue growth and cost-effectiveness.

Its typical components are:

  1. Monthly Recurring Revenue (MRR) = Number of paying users * Average revenue per user (ARPU)

  2. ARR = MRR x 12

  3. ARR Growth Rate = (ARR Current Year / ARR Past Year) / ARR Past Year

  4. EBITDA = Revenue - Operational Expenses

  5. EBITDA Margin = EBITDA / Revenue

To calculate your Rule of 40's score using these components, the formula is:

Rule of 40 = Annual ARR Growth + EBITDA Margin

Generally, the Rule of 40 tends to be most reliable for mature, established companies, being a useful tool for late-stage growth investors.

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