The Rule of 40 is a metric for measuring the relative health of companies. This page is all about the Rule of 40 list.
American entrepreneur, author, blogger, and venture capitalist Brad Feld first popularized the Rule of 40 in a 2015 blog post titled “The Rule of 40% For a Healthy SaaS Company“. The rule essentially states that the sum of sales growth and profitability in a healthy SaaS company should be greater than 40%.
In Feld’s words:
So, if you are growing at 20% (sales), you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.(Source: “The Rule of 40% for a Healthy SAAS Company”, Brad Feld)
So it can be seen that an unprofitable software company can been deemed healthy if the sales growth is high enough to compensate.
Rule of 40 Formula
In simple terms the Rule of 40 formula is given as:
Rule-of-40 Score = sales growth rate + profitability
We calculate Sales Growth as the percentage growth of recorded total revenue for the trailing twelve months of financial earnings reports, against the revenue of the previous twelve months.
Profitability is somewhat open to interpretation depending on what figures you use. The generally accepted metric for Rule of 40 calculations is EBITDA (Earnings before interest, taxes, depreciation and amortization). The total EBITDA for the trailing twelve months, divided by the total revenue for the same period (and multipled by 100) gives the EBITDA profitability.
Rule of 40 List
We update the latest Rule of 40 list on a daily basis when financial data is published through our data providers, see the current list on our homepage.
Rule of 40 Performance
We will be publishing occasional blog posts to give some insight into how Rule of 40 companies have performed over time. These will show how this metric can help inform your investment decisions.
Ruleof40.trade API access
We have a REST API interface to let you query Rule of 40 data since 2010, check it out on the API page.
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