We’ve written about the Rule of 40 in technology services (https://alten.capital/blog/rule-of-40-in-services-the-2024-view and https://alten.capital/blog/applying-the-rule-of-40-to-tech-services). We’ll discuss the merits of tracking this metric frequently.
In summary, the Rule of 40 is a metric derived from adding revenue growth and EBITDA margin. This quick heuristic helps decision-makers interpret where the business stands in terms of growth and profitability. It is such a powerful metric that keeping close tabs on it can help managers take prompt actions to impact business performance.
Early Detection of Performance Shifts: Monthly tracking enables managers to identify trends before they become significant issues.
Better Cashflow Management: Balancing the growth-profitability tradeoff can yield additional visibility into the company’s free cash flow.
Improved Investor Communication: Monthly tracking enables more nuanced explanations of performance trends.
Annual Rule of 40 example chart is below:
Rolling LTM Rule of 40 metric to compare:
Alten Capital invests in technology services businesses. Please reach out to explore potential partnerships.