SaaS Health Check
Measure the balance between growth and profitability for any SaaS company. Enter a ticker or your own projections — get an instant score, verdict, and benchmark comparison.
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SaaS Rule of 40 Comparison
| # | Ticker | Company | Growth % | FCF Margin % | Score | Verdict |
|---|---|---|---|---|---|---|
| 1 | CRWD | CrowdStrike | 33.0% | 30.0% | 63.0 | Elite |
| 2 | ZS | Zscaler | 34.0% | 22.0% | 56.0 | Strong |
| 3 | PANW | Palo Alto Networks | 14.0% | 38.0% | 52.0 | Strong |
| 4 | VEEV | Veeva Systems | 15.0% | 35.0% | 50.0 | Strong |
| 5 | DDOG | Datadog | 26.0% | 23.0% | 49.0 | Strong |
| 6 | MNDY | monday.com | 32.0% | 13.0% | 45.0 | Strong |
| 7 | DT | Dynatrace | 20.0% | 25.0% | 45.0 | Strong |
| 8 | CRM | Salesforce | 11.0% | 33.0% | 44.0 | Strong |
| 9 | TEAM | Atlassian | 20.0% | 24.0% | 44.0 | Strong |
| 10 | TTD | The Trade Desk | 26.0% | 18.0% | 44.0 | Strong |
| 11 | WDAY | Workday | 17.0% | 25.0% | 42.0 | Strong |
| 12 | HUBS | HubSpot | 21.0% | 17.0% | 38.0 | Borderline |
| 13 | SNOW | Snowflake | 32.0% | 5.0% | 37.0 | Borderline |
| 14 | NET | Cloudflare | 29.0% | 7.0% | 36.0 | Borderline |
| 15 | OKTA | Okta | 22.0% | 14.0% | 36.0 | Borderline |
| 16 | MDB | MongoDB | 22.0% | 11.0% | 33.0 | Borderline |
| 17 | S | SentinelOne | 36.0% | -6.0% | 30.0 | Borderline |
| 18 | DOCN | DigitalOcean | 12.0% | 16.0% | 28.0 | Failing |
| 19 | CFLT | Confluent | 25.0% | 3.0% | 28.0 | Failing |
| 20 | BILL | BILL Holdings | 18.0% | 8.0% | 26.0 | Failing |
Type any SaaS stock ticker and click Look Up. We pull revenue growth and FCF margin from the latest annual financials via Yahoo Finance.
Have custom projections or private company data? Enter your own revenue growth and FCF margin percentages directly.
Revenue growth + FCF margin = your Rule of 40 score. Above 40 is strong. Above 60 is elite. Below 30 is a warning sign.
See where the company lands on the scatter chart and comparison table of 20 publicly traded SaaS companies.
The Rule of 40 is a performance benchmark for software-as-a-service (SaaS) companies that balances growth against profitability. The concept was popularized by Brad Feld and other venture capitalists in the mid-2010s as a quick health check for subscription software businesses. The core idea: a company's revenue growth rate plus its profit margin should equal or exceed 40%.
Unlike simple growth metrics that reward unprofitable hypergrowth, or margin metrics that penalize high-growth reinvestment, the Rule of 40 captures the tradeoff every SaaS management team faces. A company growing at 60% with a -15% FCF margin (score: 45) and a company growing at 15% with a 30% FCF margin (score: 45) are both considered healthy — they've simply chosen different points on the growth-profitability frontier.
The original Rule of 40 used EBITDA margin, but modern analysts prefer free cash flow margin for several reasons. First, SaaS companies often capitalize software development costs, which inflates EBITDA while reducing free cash flow. Second, stock-based compensation — a massive real cost at most software companies — is excluded from EBITDA but affects dilution and real shareholder value. FCF captures these cash realities.
FCF margin is also more forward-looking. When a company's FCF margin is high, it means the business generates real cash after all capital expenditures. That cash can fund acquisitions, buybacks, or R&D acceleration without diluting shareholders or taking on debt.
The Rule of 40 is a heuristic, not a law. It works best for pure-play SaaS companies with recurring revenue models. Hardware companies, marketplaces, fintech firms with interchange revenue, and conglomerates with mixed business lines can produce misleading scores.
Timing matters too. A company in the middle of a major platform transition (like Adobe's shift to Creative Cloud) may temporarily score poorly while building long-term value. Similarly, one-time events like large contract signings, acquisition charges, or restructuring costs can distort a single year's score.
The best SaaS businesses — companies like CrowdStrike, Palo Alto Networks, and Veeva Systems — consistently score above 60. These companies have found a way to sustain high growth rates (20%+) while generating substantial free cash flow margins (30%+). This combination signals strong unit economics, pricing power, and efficient go-to-market execution.
For investors, a persistently high Rule of 40 score (tracked over multiple years) is one of the strongest signals of a durable competitive advantage in software. Companies that maintain elite scores typically have high net revenue retention rates, low churn, and expanding wallet share within their customer base.
The Rule of 40 is most useful as a screening tool, not a standalone valuation metric. Start by filtering your SaaS watchlist to companies scoring 40+, then dig deeper into the composition. A company scoring 45 with 40% growth and 5% margin is in a very different position than one scoring 45 with 10% growth and 35% margin.
Track the trajectory too. A company whose score is improving quarter over quarter is likely reaching an inflection point where growth investments start paying off through operating leverage. Declining scores, on the other hand, can be an early warning that a company is struggling to maintain either growth or margins.
Every SaaS management team faces the same fundamental decision: invest aggressively in growth (sales, marketing, R&D) at the expense of near-term profitability, or optimize for margins and accept slower growth. The scatter chart in this calculator visualizes this tradeoff — companies above the diagonal Rule of 40 line have found a sustainable balance.
The market tends to reward companies above the line with premium valuations, measured by EV/Revenue multiples. Companies below the line face valuation compression unless they can articulate a credible path back above 40 through either growth re-acceleration or margin expansion.
The Rule of 40 is a benchmark that states a healthy SaaS company's combined revenue growth rate and profit margin (typically FCF margin) should exceed 40%. For example, a company growing at 30% with a 15% FCF margin has a Rule of 40 score of 45 — considered strong.
Rule of 40 Score = Revenue Growth Rate (%) + Free Cash Flow Margin (%). Revenue growth is the year-over-year percentage change in total revenue. FCF margin is free cash flow divided by total revenue, expressed as a percentage.
Scores above 40 are considered strong. Elite SaaS companies like CrowdStrike and Palo Alto Networks score above 60, meaning they grow fast while generating significant free cash flow. Scores below 30 signal a company may be neither growing fast enough nor profitable enough.
FCF margin is harder to manipulate and reflects actual cash generation after capital expenditures. EBITDA can be inflated by aggressive capitalization of software development costs. FCF gives investors a clearer picture of the cash available for buybacks, dividends, or reinvestment.