What is accretive?

In finance, as in the wider world, accretive is the adjective of accretion and refers to gradual increase or growth.

Define accretive.

An accretive asset, therefore, is something that increases in value after purchasing it. An accretive acquisition, of a company or asset, must ultimately bring more value than it costs to buy it.

As well as considering whether the asset or acquisition will indeed prove accretive, investors and businesses will also bear the rate of accretion in mind. This refers to the pace at which the investment will actually increase in value.

Examples of accretion.

In terms of zero coupon bonds, this rate is fairly simple to determine:

If you purchase a $100,000 zero-coupon bond with a ten-year maturity for $80,000, the total accretion will be $20,000. Dividing this by the period until maturity and assuming you update your accounts annually, you are left with an accretion rate of $2,000 per year.

In the world of mergers and acquisitions, an accretive merger can be said to be one that improves the earnings per share (EPS) of a company. The opposite of accretive is dilutive.

Investment banks and venture capital firms will thus undertake accretion/dilution analyses to determine whether a company is fit for acquisition. Although no sane firm deliberately opts for an ultimately dilutive transaction, some short-term earnings ratio dilution is often tolerated should the deal prove accretive in the long-term.

In addition to analysing a deal’s effect on EPS, investors may also consider whether a deal is margin accretive; determining whether a transaction has increased a company’s efficiency by improving operating margins and gross profit margins.