What is the Cramer rule of 40?
Asked by: Avery Stokes | Last update: October 4, 2025Score: 4.7/5 (14 votes)
Rule of 40 Definition: In Software as a Service (SaaS) financial models, the “Rule of 40” states that a company's Revenue Growth + EBITDA Margin should equal or exceed 40% to be considered “healthy”; companies that exceed it by a wider margin may be valued more highly.
What is the rule of 40 simplified?
In the simplest terms, the Rule of 40 states that a company's combined growth rate plus profit margin should always reach or exceed 40%. It was popularized when Techstars founder Brad Feld wrote about it in 2015, after he heard it from a late-stage investor at a board meeting.
What does rule of 40 tell you?
The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a sustainable rate, whereas companies below 40% may face cash flow or liquidity issues.
What is the 40% rule in stocks?
The Rule of 40 says that the sum of the revenue growth rate and the profit margin should be 40% or higher. Because this metric takes into account both growth and profit, it allows investors and stakeholders a way to quickly determine whether a SaaS company is balancing growth with profitability.
Does the rule of 40 still apply?
It should be noted that the Rule of 40 only applies to SaaS businesses. This is because software companies that leverage their services to other businesses are known to manage higher margins between 70% and 90%. However, this rule of thumb can still be applied as a useful benchmark for other subscription companies.
The SaaS Rule of 40 | How to Calculate and Why It Matters
Is the rule of 40 dead?
The traditional Rule of 40 math is dead wrong. The world has over-rotated into a FCF margin mindset over a growth mindset, which is backwards for growing efficient businesses. Long-term models show that even in tight markets, growth should be valued at least ~2x-3x more than FCF margin.
Who does Rule 40 apply to?
The rule applies to participants in the Olympic or Paralympic Summer Games 2024, including current competitors, coaches, trainers and officials. It only applies to participants in the current Games and is not applicable to alumni.
At what age should you get out of the stock market?
The reality is that stocks do have market risk, but even those of you close to retirement or retired should stay invested in stocks to some degree in order to benefit from the upside over time. If you're 65, you could have two decades or more of living ahead of you and you'll want that potential boost.
What is the 90% rule in stocks?
Understanding the Rule of 90
The Rule of 90 is a grim statistic that serves as a sobering reminder of the difficulty of trading. According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
What is the 10 5 3 rule?
The 10,5,3 rule will assist you in determining your investment's average rate of return. Though mutual funds offer no guarantees, according to this law, long-term equity investments should yield 10% returns, whereas debt instruments should yield 5%. And the average rate of return on savings bank accounts is around 3%.
What is the alternative to the rule of 40?
Meritech Capital also has an alternative to the Rule of 40, which they call the “Meritech Rule of 40”. It applies the same principle by using a multiplier times the growth rate using a two-factor regression of NTM revenue growth and NTM FCF margin to the ARR multiple.
Is 60% EBITDA good?
A good EBITDA growth rate varies by industry, but a 60% growth rate in most industries would be a good sign.
Can rule of 40 be negative?
However, as long as you are burning money to drive growth, the Rule of Negative 40 is a much better metric. Here's why: For every dollar of additional revenue, you are adding, at a minimum, 6x that in additional company enterprise value, given the low end of SaaS valuations.
What is the rule of 40 for dummies?
The Rule of 40 states that if an SaaS company's revenue growth rate is added to its profit margin, the combined value should exceed 40%. In recent years, the 40% rule has gained widespread adoption as a popularized measure of growth by SaaS investors.
What is the difference between EBITDA and arr?
ARR – The company's annual recurring revenue. EBITDA – The company's earnings before interest, taxation, depreciation, and amortization; basically the same as operating cash flow, except it takes interest and taxes into account.
Is 40% EBITDA good?
It suggests that the sum of a company's top line year over year growth rate (annual recurring revenue growth percentage) and its EBITDA margin should ideally be at least 40%. This rule helps buyers and investors evaluate whether a company is effectively balancing growth with profitability.
What is the golden rule of stock?
Keeping your portfolio diversified is important for reducing risk. Having your portfolio in only one or two stocks is unsafe, no matter how well they've performed for you. So experts advise spreading your investments around in a diversified portfolio.
What is the $1 dollar rule for stocks?
Nasdaq Rules require a company's equity securities listed on the Nasdaq Global Select Market, Nasdaq Global Market, and Nasdaq Capital Market to maintain a minimum bid price of at least one dollar per share (the “Bid Price Requirement”).
What is the 1 rule in trading?
The 1% rule demands that traders never risk more than 1% of their total account value on a single trade. In a $10,000 account, that doesn't mean you can only invest $100. It means you shouldn't lose more than $100 on a single trade.
How much should a 70 year old have in the stock market?
Older investors in their 70s and over keep between 30% and 33% of their portfolio assets in U.S. stocks and between 5% and 7% in international stocks. Generally speaking, your age determines how much risk you're willing to take on your investments.
Where is the safest place to put your retirement money?
Bank Savings Accounts
If you put your money in a bank account, you can be very confident that you'll be able to access it again in the future. And, deposits in savings accounts from most banks are FDIC insured. That means that even if your bank becomes insolvent, the federal government covers your savings.
How to invest $100k at 70 years old?
- Invest in stocks and stock funds.
- Consider indexed annuities.
- Leverage T-bills, bonds and savings accounts.
- Take advantage of 401(k) and IRA catch-up provisions.
- Extend your retirement age.
What is the rule 40 violation?
Essentially, Rule 40 prohibits athletes (and others who are accredited for the Games ) from agreeing to appear in all forms of advertising during, and for a short period before, the Games, without permission of the International Olympic Committee (IOC).
What is the rule 40 ambush?
The IOC adopted Rule 40 (“Rule”) to control advertising by both official sponsors and others in an attempt to limit “ambush marketing.” Ambush marketing refers to advertising campaigns during an event like the Olympics, that incorporate words or images that associate a brand with the event (For more information on ...
What is Federal Rule 40?
Rule 40 – Scheduling Cases for Trial. Each court must provide by rule for scheduling trials. The court must give priority to actions entitled to priority by a federal statute.