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Rule of 40

A software rule of thumb: revenue growth rate plus profit margin should be at least 40%.

FundamentalsIntermediate

Definition

The Rule of 40 balances growth against profitability for subscription software companies. A company growing 30% with a 15% margin scores 45.

Formula

Rule of 40 score = revenue growth % + profit margin %

Watch out for

It is a rough screen and companies choose which margin to use.

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