The rule of 40 is a benchmark that states the sum of a company’s annual growth rate and EBITDA margins should exceed 40%. For example, if your company grew 50% in the last twelve months and had a 20% EBITDA loss during that same period, your RO40 sum would be 50%-20%= 30%. To reach the 40%, you would either need to increase growth by 10%, cut your EBITA loss by 10%, or any other combination of your growth rate/EBITDA to achieve 40% or above. Investors use the RO40 to assess the health of your business. It measures the tradeoffs between balancing growth and profitability. Since it is a high-level performance metric, companies start to use the rule of 40 once they reach $1M ARR.
The rule of 40 is a benchmark that states the sum of a company’s annual growth rate and EBITDA margins should exceed 40%. For example, if your company grew 50% in the last twelve months and had a 20% EBITDA loss during that same period, your RO40 sum would be 50%-20%= 30%. To reach the 40%, you would either need to increase growth by 10%, cut your EBITA loss by 10%, or any other combination of your growth rate/EBITDA to achieve 40% or above. Investors use the RO40 to assess the health of your business. It measures the tradeoffs between balancing growth and profitability. Since it is a high-level performance metric, companies start to use the rule of 40 once they reach $1M ARR.
