The stress test for growth stocks: revenue growth plus free-cash-flow margin must reach at least 40 combined, automated across the entire market.
Save the strategy and StockScorer checks its rules for you every day. You'll get a heads-up whenever a stock crosses the upper or lower score threshold.
Once enough history is available, the backtest chart for this strategy will appear here.
Every stock runs through the same disclosed rules. The points add up to a score, traceable down to the individual rule.
Each rule checks a metric against a threshold, for example ROE above 15 %.
You decide how much each rule counts: from +1 to +3 or −1 to −3.
The sum is the score. Above the upper threshold: a high match with the profile.
These terms describe only the match with the criteria, not a recommendation to buy or sell.
Year-over-year revenue growth is the first half of the 40 sum.
The FCF margin shows whether growth generates or burns cash, the second half of the sum.
Only a sum of 40+ satisfies the rule; 25–40 counts as healthy, below 10 as a warning sign.
Negative revenue growth costs 3 points, the strategy's harshest deduction.
For growth-oriented investors who want to weed out loss-makers without giving up momentum. The strategy is tailored to software and technology business models. In capital-intensive industries with structurally thin margins, the 40 hurdle is rarely attainable.
The Rule of 40 comes from the venture-capital world and is the established yardstick for software and technology companies: heavy losses are acceptable as long as growth justifies them, and vice versa. StockScorer computes the sum of revenue growth (year over year) and FCF margin as a genuine arithmetic criterion. From 40 points the rule counts as met, from 50 as efficient hypergrowth. Shrinking revenue is punished drastically: a growth company that shrinks loses its reason to exist as a growth stock.
At the core sits a single arithmetic criterion: revenue growth (in %) plus FCF margin (in %). A sum of 50 or more earns +4 points, 40–50 +3, 25–40 +1. Below 10 (stagnation or cash burn without growth to compensate) costs 2 points, and shrinking revenue another 3.
That yields a range from −5 to +4 points. The upper threshold is 3 points (small caps: 4), reachable only if the Rule of 40 is genuinely met. A company with 30% growth and a −5% FCF margin (sum 25) stays in the middle zone: dynamic, but not yet efficient enough.
Sum ≥ 50: hypergrowth with high capital efficiency (+4).
Sum 40–50: the golden Rule of 40 is met (+3).
Sum 25–40: healthy growth with mild inefficiencies (+1).
Sum below 10 or not computable: stagnation or cash burn (−2).
Revenue growth negative: strategic warning signal (−3).
Its strength is balancing the classic growth dilemma: pure revenue growth rewards cash burners, pure margin punishes investment in growth. The sum allows both, as long as the mix works.
Limits: the rule is a sector tool. Outside software, platforms and asset-light business models (say, industrials or retail) sums of 40+ are structurally rare. There the strategy measures exceptional states rather than quality. Cyclical revenue jumps can also distort the sum in the short term.
For growth investors with an elevated volatility tolerance who only accept growth when it comes with capital efficiency.