The Rule of 40 in European Companies: An Empirical Analysis of the Balance Between Growth and Profitability in the SaaS Industry

Abstract

This study examines the relevance of the Rule of 40, a benchmark that combines revenue growth and profitability, in the valuation of publicly traded European SaaS companies between 2019 and 2023. Using panel data regression with fixed effects, the analysis explores whether firms that meet or exceed the Rule of 40 receive higher valuation multiples compared to those that do not. The results show that from 2021 onward, companies that complied with the Rule of 40 consistently achieved valuation premiums. Revenue growth is found to have a strong and statistically significant positive effect on enterprise value relative to revenue, while most profitability measures show weaker or inconsistent associations. Among the profitability indicators, only gross margin demonstrates a stable and significant link to valuation. These findings suggest that investors in the European SaaS sector continue to emphasize growth. The increasing relevance of profitability may indicate a gradual shift in investor focus as the industry evolves and matures.