The single number investors use to judge SaaS health: growth rate + profit margin ≥ 40 = good.
This calculator computes your Rule of 40 score by adding year-over-year ARR growth rate to a profitability margin (EBITDA, operating margin, or free cash flow, depending on which profit metric you select). A score at or above 40 is the common benchmark investors apply to SaaS companies at Series B and later, on the reasoning that fast growth can justify thin margins and strong margins can justify slower growth. For API and cloud businesses, the margin side of the equation is driven largely by cost of revenue — inference spend, compute, storage, and egress — so infrastructure efficiency directly moves the score. A company can raise its Rule of 40 result either by accelerating growth or by reducing the unit cost of serving each customer.
A score of 40 or higher is the standard benchmark, and scores above 50 are considered strong. Scores below 20 typically signal that a company is neither growing fast enough nor profitable enough to justify a premium valuation, though early-stage companies are usually evaluated on growth alone.
Free cash flow margin is the most conservative and the one most investors prefer, because it accounts for capitalized costs and working capital. EBITDA margin and operating margin are also used, but they can overstate health for infrastructure-heavy businesses with large prepaid compute commitments or capitalized software costs.
Cost of revenue reduces gross margin, which flows directly into whatever profit margin you use in the calculation. For an AI or API product where inference and bandwidth are a large share of revenue, a few percentage points of infrastructure savings translate one-for-one into a higher Rule of 40 score.