The **[[Rule of 40]]** is a business investment principle or guideline that states that a [[SaaS]] business should have a combined [[Revenue Growth Rate]] and [[Profit Margin]] of at least 40%. ^about The **growth rate** refers to the proportional increase in revenue compared to the same time last year. The **profit margin** refers to how much of that revenue reaches the bottom line, typically calculated using the [[EBITDA]]. The premise is that for a SaaS business to be healthy and investable, it should have a high profit margin, high growth rate, or a combination of the two. The mix of growth rate and profit margin can vary wildly depending on the business, the product, and what stage they are in. However, a lack of either at any stage can indicate stagnation and/or liquidity issues.