The Rule of 40 is a simple benchmark that combines revenue growth and profitability to provide a quick view of business performance. Originally applied to software and SaaS companies, it has also proven helpful in evaluating technology services, where cash flow dynamics differ but the balance between growth and margins remains central.
Frequent tracking of the Rule of 40 can add value beyond the annual snapshot:
Early Performance Signals: Monitoring the metric monthly helps detect shifts in growth or margins as an early indication of performance drift.
Cash Flow Insights: Understanding the tradeoff between growth and profitability supports better visibility into free cash flow.
Investor Communication: A rolling view provides clearer explanations of short-term changes and longer-term trends.
The chart below illustrates the annual Rule of 40 metric:
The chart below shows the rolling LTM Rule of 40, offering a month-by-month perspective on revenue growth and EBITDA margin:
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