Business
Rule of 40 Calculator
Calculate ARR growth, EBITDA margin, free-cash-flow margin, classic and cash-based Rule of 40 scores, and an explicit weighted blend. Review score composition, exact scenarios, definition choices, limitations, and a professional PDF.
ARR growth rate-
Adjusted EBITDA margin-
Free cash flow margin-
Growth plus EBITDA margin-
Growth plus free-cash-flow margin-
Weighted selected margin-
Growth plus blended margin-
Decision view
Growth-plus-margin score composition
Growth-plus-margin score compositionThe EBITDA and free-cash-flow definitions are shown as separate equations rather than blended into one ambiguous score.
Rule-of-40 scores across ARR scenariosCurrent ARR is horizontal; EBITDA-based and free-cash-flow-based scores remain separate percentage lines.
Exact scenario comparisonCurrent ARR changes while all other entered assumptions remain constant.
| Current ARR | ARR growth rate | Adjusted EBITDA margin | Free cash flow margin | Growth plus EBITDA margin | Growth plus free-cash-flow margin | Weighted selected margin | Growth plus blended margin |
|---|
Period-by-period detail
Growth and margin score ledger
How to use Rule of 40 Calculator
- Enter comparable prior and current ARR values.
- Enter current annual revenue, adjusted EBITDA, and free cash flow.
- Choose the EBITDA share used in the blended margin.
- Compare the EBITDA, FCF, and blended score compositions before citing one result.
Calculator guide
Understanding Rule of 40 Calculator
The Rule of 40 combines a recurring-revenue growth rate with a profit or cash-flow margin. Because organizations use different margin definitions, this page keeps EBITDA, free-cash-flow, and an explicit blended score separate.
Calculation method
How the calculation works
Calculate ARR growth and both EBITDA- and cash-flow-based Rule of 40 scores, including an explicit margin weighting. ARR growth divides the change from prior ARR to current ARR by prior ARR. EBITDA and FCF margins divide their respective amounts by annual revenue. Each Rule of 40 score adds ARR growth to the selected margin; the blended view uses the entered EBITDA weighting.
Metric policy
Publish the score with its definition
A Rule of 40 number is not comparable unless its inputs and adjustments are named.
Worked situations
Practical examples
- 25% ARR growth plus a 7% EBITDA margin produces a 32% classic score.
- A cash-based score can be lower when working capital or capital expenditure consumes cash.
- Changing the weight makes the management definition explicit rather than silently switching margins.
Better inputs
Useful tips
- State the growth period, ARR policy, and margin definition beside every reported score.
- Use organic, constant-currency figures when that is the intended comparison.
- Review absolute cash generation and growth quality in addition to the combined percentage.
Before relying on the result
Limitations and common mistakes
- There is no single authoritative Rule of 40 definition.
- Adjusted EBITDA and FCF can be affected by classification, capitalization, acquisitions, FX, and working capital.
- The score does not measure valuation, retention, customer concentration, or balance-sheet risk.
Reference
Key terms
- ARR growth
- Percentage change in annual recurring revenue between comparable dates.
- EBITDA margin
- Adjusted EBITDA divided by current annual revenue.
- FCF margin
- Free cash flow divided by current annual revenue.
- Blended score
- ARR growth plus the explicitly weighted margin.
Important note
Calculated from the entered values using the displayed accounting method. Reconcile material decisions with source records and applicable accounting policy.
Frequently asked questions
Must the score equal 40%?
No. Forty is a screening reference, not a guarantee of quality or value.
Should I use EBITDA or FCF margin?
Use the measure appropriate to the decision and disclose it; this page shows both.
Can growth or margin be negative?
Yes. A strong positive component can offset a negative one in the combined score.
Why include a blended margin?
It makes an organization-specific weighting explicit and prevents hidden changes in definition.