The Rule of 40 is a Wall Street SaaS health check: growth + profitability combined should clear 40 percentage points. A company growing 60% with -20% margin scores 40. A company growing 25% with 15% margin scores 40. Both pass. Above 40 = healthy; below = either growth or profitability needs improvement. Often used to filter SaaS companies for investment.
ARR growth rate (%) + Free Cash Flow margin (%)30% YoY ARR growth + 15% FCF margin = 45 (passes Rule of 40).
See how public B2B SaaS companies disclose this metric, with full historical time series.