Rule of 40
A SaaS health metric: revenue growth rate + profit margin should equal 40% or more.
The Rule of 40 is a heuristic for evaluating SaaS company health: the sum of revenue growth rate (year-over-year percentage) and profit margin (EBITDA margin) should equal 40% or more. A company growing 100% with -60% margin meets the rule; a company growing 20% with 20% margin also meets it.
The Rule of 40 became popular during the 2010s SaaS boom and is used by investors to evaluate the trade-off between growth and profitability.
A SaaS company grows ARR 35% year-over-year and operates at 10% EBITDA margin. 35% + 10% = 45%. Meets the Rule of 40.
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