Rule of 40 Deferred Revenues
Have been reviewing SaaS metrics and looking at the Rule of 40 which can be calculated as ARR Growth % + FCF Margin %. On the FCF margin %, do you typically exclude the positive impact of changes in deferred revenue (given an early-mid stage growth company)?
I would include those - these are usually part of the Adj. Cash EBITDA metric used for valuation.
Thanks lycurgus!
While we are on the topic, I have seen alternative measures being suggested like GM% or EBITDA%. Is there an industry norm?
Cash EBITDA.
100% yes
I've also seen "Rule of X" mostly simply as: % growth in revenue + % EBITDA margins (not necessarily cash EBITDA).
Most public companies stick to the traditional rev growth + FCF margin, but some companies tailor it to align with their key metrics instead. As you say, ARR growth is an easy substitute, and some companies use operating margin or EBITDA margin instead of FCF margin.
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