Rule of 40

Rule of 40 measures the balance between revenue growth and profitability by adding a company's year-over-year revenue growth rate to its EBITDA Margin.

The framework recognizes that faster-growing companies can support lower profitability, while slower-growing companies generally need stronger margins to produce a comparable overall performance profile.

A Rule of 40 score of 40% or higher is a commonly used reference point for balancing growth and profitability. The metric can be less relevant for earlier-stage companies that are growing rapidly on a percentage basis or have high operating expenses relative to their revenue scale. A company can reach the same score through very different combinations of growth and margin. Rule of 40 should therefore be evaluated alongside its underlying components rather than as a standalone measure.

MetricFrame calculates Rule of 40 by adding YoY Net Revenue Growth and EBITDA Margin. It also calculates a TTM growth version using TTM YoY Net Revenue Growth and EBITDA Margin.