Rule of 40

The Rule of 40 is a SaaS benchmark stating that a company’s revenue growth rate plus its profit margin (usually EBITDA or free cash flow margin) should add up to 40% or more. It’s a quick check on whether growth is being bought at a reasonable cost.

The score swings hard depending on what feeds it: reconciled actuals produce a different number than plan-optimistic revenue or a loosely defined margin line. A company can look comfortably above 40 on forecast inputs and fall short on what actually closed. See the SaaS metrics an AI can actually get right.