The Rule of 40

Growth and profits often pull in opposite directions. The Rule of 40 is a quick way to judge whether a software company balances them well: add the growth rate and the profit margin, and look for 40 or more.

The formula

Rule of 40 score = revenue growth rate + profit margin. A company growing 30% with a 10% margin scores 40. So does one growing 10% with a 30% margin. Most investors use free cash flow margin for the profit part, because it reflects actual cash.

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