A4 · Calculator · Descriptive valuation scenarios

Rule of 40 / Rule of X Calculator

Rule of 40 and Rule of X are descriptive scores. This calculator uses ARR growth plus EBITDA margin for Rule of 40, and weighted ARR growth plus FCF margin for Rule of X. The default weight of 2 is an illustrative scenario. State the sample, era and valuation specification when estimating a weight; the score does not establish how an operating policy will affect value.

directional Model updated 2026-10-05

Formulas

Rule of 40 descriptive score

R_{40} = ARR Growth% + EBITDA Margin%

Reads as: add the chosen growth and margin percentages under a declared convention. A score of 40 is a practitioner reference point, not a universal health or funding gate.

Rule of X descriptive score

R o X = w ARR Growth% + FCF Margin%

Reads as: choose or estimate w for a defined market and era. An observational valuation association does not identify the marginal causal return to spending on growth.

Calculator

ARR growth rate (%) FCF margin (%) Rule of X growth weight (scenario) EBITDA margin (%)

Rule of 40

growth + EBITDA margin

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Rule of X

weighted growth + FCF margin

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Compare the conventions

EBITDA margin and FCF margin measure different things. Changing both the margin measure and the growth weight means the difference between the two scores cannot be attributed to the weight alone. Align the growth period and definitions before comparing companies.

Neither score determines the best balance of growth and margin. A policy decision needs incremental contribution, cash, risk, capacity and feasible alternatives. Report a sensitivity range rather than treating a selected weight as an identified operating coefficient.