Rule of 40 Stocks: Check Growth, Margin and Reporting Choices

Calculate the Rule of 40 with a named margin

For public stock research, one reproducible version uses reported annual revenue growth plus a selected annual margin. Revenue growth = (current revenue / prior comparable revenue - 1) × 100. Margin = selected profit or cash flow / current revenue × 100. Add the two percentage values as score points: 25% growth plus 18% margin gives 43, not a 43% investment return. Use unrounded inputs when applying the 40 threshold.

• GAAP operating version: revenue growth plus operating income / revenue × 100.
• EBITDA version: revenue growth plus EBITDA / revenue × 100. Label adjusted EBITDA separately if the company makes further exclusions.
• Cash flow version used here: revenue growth plus (operating cash flow - capital expenditures) / revenue × 100. Treat capital expenditures as a positive cash outflow.
• Keep gross margin separate: it excludes operating expenses and is not interchangeable with operating profit margin.

Separate GAAP results from company adjustments

A GAAP operating margin retains expenses recorded in operating income. EBITDA excludes interest, tax, depreciation and amortization; adjusted EBITDA may exclude additional costs such as stock-based compensation or restructuring. Read the issuer's reconciliation rather than assuming two companies use the same exclusions. The Rule of 40 itself is a benchmark, not a GAAP financial statement measure. An operating margin based on GAAP numbers does not make every other version comparable.

• In the example, the $100 difference between operating income and adjusted EBITDA must be explained by the assumed reconciliation; the higher score alone does not explain it.
• Record stock-based compensation and diluted share count when judging shareholder economics, even if an adjusted metric removes that expense.
• Keep the same definition for every peer and historical period. If a company changes its definition, restate the comparison where possible or flag the break.

Read the cash flow version alongside cash obligations

The SEC notes that free cash flow has no uniform definition. Operating cash flow less capital expenditures is a common version, but an issuer may publish an adjusted measure with other exclusions. Start with the cash flow statement and inspect the reconciliation. In the example, subtracting $70 of capital spending from $160 of operating cash flow leaves $90; using operating cash flow alone would give a score of 41 instead of 34.

• Upfront subscription collections and changes in working capital can raise operating cash flow without a matching change in earned revenue.
• Cash flow adds back noncash expenses such as stock-based compensation; a positive FCF score does not remove dilution.
• FCF under this definition does not deduct every financing obligation or acquisition payment. Review debt repayments and other cash needs separately.
• Capital expenditure exclusions or capitalized software spending can change comparisons. Keep the chosen definition visible.

Align the period before comparing TradingView with a filing

TradingView explains that standardized financial data can differ from the values presented in an annual or interim report. Use a chart discrepancy as a question to investigate: is it caused by the period, the field definition, currency, or standardization? Record both the fiscal period end and the date the report became public. A fiscal year label is not a publication date, and today's restated data is not automatically the data an investor had at an earlier date.

• For an annual screen, compare FY2025 revenue with FY2024 revenue and use FY2025 profit and cash flow amounts.
• For TTM, sum the latest four fiscal quarters and compare revenue with the preceding four. Divide TTM profit or FCF by current TTM revenue; do not average four quarterly margins.
• Quarterly cash flow reports may show year-to-date totals. Derive individual quarters before summing them so earlier quarters are not counted twice.
• Do not combine quarterly growth with an annual margin, or forecast growth with historical margin, without labeling that as a different screen.
• If either revenue denominator is zero or negative, this percentage-growth and margin screen is not meaningful. Missing profit, cash flow or revenue is unknown, not zero.

Use the SaaS benchmark within its limits

Brad Feld's 2015 discussion concerned software and SaaS businesses at scale. It discussed recurring revenue growth, preferred EBITDA as a baseline and compared other profit measures. Public-company revenue growth is a practical variant when reported revenue is available; it is not the same as growth in annual or monthly recurring revenue. Check services revenue, acquisitions and currency effects before comparing two software companies.

• A hypothetical company with 45% growth and a -5% margin scores 40 despite losing money. A company with 10% growth and a 30% margin also scores 40, with a different growth and funding profile.
• A revenue decline of -5% plus a 45% margin also reaches 40. The arithmetic does not establish durable demand.
• Hardware, banks, retailers and capital-intensive businesses have different economics. Do not treat 40 as a universal cross-industry quality threshold.
• A small revenue base, acquisition-led growth or one strong cash collection period can distort the comparison. Inspect several periods and the business model.
• Even a sustained score above 40 says nothing about the price paid for the stock. Valuation, debt, dilution and customer concentration remain separate research questions.

Build a research worksheet from the chart question

Start with a software company you are reviewing on TradingView, then open its annual report and earnings reconciliation. Save the issuer, period end, publication date, currency, source URL, revenue for both years, selected margin numerator and score. A Rule of 40 stock screener is useful only when those fields can be checked. This page provides a method and an assumed example, not a current list of qualifying stocks.

• Choose a comparable software universe and fix the margin definition before collecting candidates.
• Calculate each score and mark missing or incomparable values for review instead of forcing a pass or fail.
• For a pass, review retention or churn where disclosed, cash runway, debt, share dilution and valuation. Record the reasons a candidate might still be unsuitable.
• Revisit the worksheet after a new filing or restatement; retain the old dated version if you are studying what was known at the time.

Continue the statement review with AI Finance Agent

Pineify AI Finance Agent has tools for retrieving as-reported income and cash flow statements by stock symbol and annual or quarterly period. Use those results to organize the calculation, then compare the returned line items with the issuer's public filing. Data coverage and availability vary; the agent response still needs review. It does not turn the 40 threshold into a target price or investment guarantee.

• Suggested request: Retrieve annual as-reported income and cash flow statements for my selected symbol. Show the fiscal dates, currency, revenue growth and operating margin. Calculate FCF as operating cash flow less capital expenditures, and mark missing inputs.
• For adjusted EBITDA, supply or locate the issuer's reconciliation before adding a third score. Do not infer missing adjustments from the GAAP figures.

Sources and verification date

Method sources checked on October 18, 2026: Brad Feld, The Rule of 40% For a Healthy SaaS Company (2015); SEC, Non-GAAP Financial Measures, including Questions 102.07 and 103.01; and TradingView, Why does Financial Data differ from other sources? Links are in Related Resources. The financial amounts on this page are hypothetical teaching inputs.