How to Calculate the Rule of 40: SaaS Health Score Formula

The Rule of 40 is a simple test for SaaS company health: add your revenue growth rate to your profit margin, and if the result is 40 or above, the business is considered healthy. Below 40 signals that either growth is slow or the business is burning too much cash (or both).

It's used by investors, analysts, and acquirers to quickly benchmark a SaaS company across the growth-profitability tradeoff — without needing to dig into a full financial model.

What Is the Rule of 40?

The Rule of 40 acknowledges a fundamental tension in SaaS: fast-growing companies burn cash, and highly profitable companies typically grow slowly. Neither extreme is ideal. The Rule of 40 creates a combined score that rewards companies that balance the two.

A company growing 60% YoY with a −20% profit margin scores 40 (60 − 20 = 40) — exactly at the threshold. A company growing 15% with a 30% profit margin also scores 45 (15 + 30 = 45). Both can be considered healthy.