Rule of 40 score = Revenue growth % + Profit margin % ; pass if >= 40
Rule of 40: growth plus margin should clear 40% for a healthy software business.
What it is
The Rule of 40 is a rough benchmark used mainly for software and subscription companies. It says a healthy business should have its annual revenue growth rate plus its profit margin sum to 40% or more. It balances the trade-off between growing fast and being profitable.
Why it matters
Fast-growing software firms often run losses to fund growth, so margin alone looks bad. The Rule of 40 lets you reward growth and profit together, so a 50%-growth, -10%-margin firm (40) and a 10%-growth, 30%-margin firm (40) both pass. Falling below 40 is a flag that the growth-versus-profit mix is weakening.
How it's calculated
Add the year-over-year revenue growth rate to a profitability margin, both expressed as percentages; 40 or above passes. The margin used varies (commonly EBITDA margin or free-cash-flow margin), so always confirm which one is being used before comparing companies.
How Quintarthai uses it
Growth and margin inputs for the Rule of 40 appear on a company deep-analysis page (Financials and Statistics tabs), where you can read revenue growth and margins side by side.
Cross-border note. It applies the same way to US and Canadian software names, but compute growth in the company's reporting currency so a currency swing does not distort the growth rate.
FAQ
Which margin should I use in the Rule of 40?
There is no fixed standard. EBITDA margin and free-cash-flow margin are the most common. The key is to use the same margin for every company you compare, or the scores are not comparable.
Does the Rule of 40 work for non-software companies?
It was designed for high-growth software and subscription businesses. For slow-growth, capital-heavy industries like utilities or banks it is not a meaningful benchmark.
Check your understanding
A software firm grows revenue 50% year-over-year but runs a -10% profit margin. How does it score on the Rule of 40, and what does that mean?
The Rule of 40 simply adds growth (50%) to margin (-10%) to get 40, which meets the threshold — the framework deliberately lets growth offset thin or negative margins.