Rule of 40

is growth paying for itself? · Risk & quality — durability and the shape of the bet

For growth companies (especially software): revenue growth % + profit margin % should clear 40. It’s a balance test — a company growing 50% can afford to lose a little money (50 + −10 = 40), while a slow grower must be solidly profitable (10 + 35 = 45). Below 40 suggests the growth isn’t paying for itself.

revenue growth %  +  profit margin %   ≥   40

revenue growth %

— how fast the top line is growing year over year

profit margin %

— how much of revenue is kept as profit

• Wikipedia — the Rule of 40 ↗