The Rule of 40 is a metric that is used to determine the health of a software company. This metric takes into account both revenue growth and profitability. In order to be considered healthy, a software company must have a combined total of 40% growth or more.
The Rule of 40 is important because it gives investors and analysts a quick way to gauge the health of a software company. If a company has a combined total of less than 40%, it may be cause for concern.
The Rule of 40 is calculated by adding together a company's revenue growth rate and its profit margin. For example, if a company has a revenue growth rate of 20% and a profit margin of 10%, its Rule of 40 score would be 30%.
A good Rule of 40 score is anything above 40%. A score between 30-40% is considered average, while anything below 30% may be cause for concern.