Rule of 40 · Growth and profitability
Treats revenue growth plus FCF margin summing to 40 as healthy growth, maps the degree of attainment to a suggested EV/Sales multiple band, and cross-checks with LTV/CAC and CAC payback period.
- Guide level
- Practical
- Output
- Screening and validation
Core formula
Rule of 40 score = revenue growth(%) + FCF margin(%); ≥ 40 is considered healthy, cross-checked with LTV/CAC and CAC payback periodHow to interpret it
Treats revenue growth plus FCF margin summing to 40 as healthy growth, maps the degree of attainment to a suggested EV/Sales multiple band, and cross-checks with LTV/CAC and CAC payback period.
The output should be read as a scenario or decision aid, not as a guaranteed price target. Compare it with at least one method based on different economic assumptions.
Practical workflow
- Normalize the latest public financial and operating data.
- Choose assumptions that match the company's economics and accounting structure.
- Calculate conservative, base and optimistic cases where the method permits.
- Compare the result with market pricing and an independent valuation method.
- Document the assumptions that drive the largest changes in value.
Key limitation
The 40 threshold is an industry rule of thumb, not a statistical or theoretical result, and is sensitive to accounting treatment of stock compensation.
How Stockinsky uses it
Stockinsky uses this framework only when the company type and available data support it. Professional valuations expose assumptions, sources and warnings instead of presenting false precision.