Rule of 40

Add the revenue growth rate to the operating or free cash flow margin. A company growing 30% at a negative 5% margin scores 25; one growing 10% at a 35% margin scores 45.

It exists to stop the two being judged separately. Losing money is acceptable while growing fast, and growing slowly is acceptable while highly profitable, but neither at once, and the rule captures that trade off in one number.

It is a heuristic rather than a law, and the margin definition matters: operating margin, EBITDA margin and free cash flow margin give materially different scores for the same company, so comparisons need a consistent basis.

Its usefulness is as a screen. A company scoring well below 40 is not earning the right to be lossmaking, which is the question the market asks whenever the cost of capital rises.