Accretive

What Is Accretive?

“Accretive” describes gradual or incremental growth. In finance, the term most often refers to transactions or investments that increase a company’s value—commonly measured by earnings per share (EPS)—or securities bought at a discount that gain value over time.

Key Takeaways

• Accretive deals lead to an increase in value (often EPS) for the acquiring company.
• Accretive investments include discounted securities that rise in value as they accrete to par or face value.
• The opposite of accretive is dilutive, which describes deals that reduce EPS.
• In practice, determining whether a deal is accretive requires analyzing financing, share issuance, and any expected synergies.

How Accretive Growth Works

Accretion in fixed income:
* Discounted bonds (including zero-coupon bonds) are bought for less than face (par) value. Over time they accrete to face value as interest effectively accumulates.
* For some bonds, interest payments occur periodically; for zero-coupon bonds, the investor receives the full accreted value at maturity.

Accretion in corporate transactions:
* An acquisition is considered accretive if the acquirer’s pro forma EPS after the deal is higher than its standalone EPS before the deal.
* Whether a deal is accretive depends on purchase price, the source of financing (cash, debt, or equity), changes in share count, and any realized synergies or costs.

Calculating the Accretion Rate

A simple annual accretion amount for a discounted security can be calculated as:

Annual accretion = (Face value − Purchase price) / Number of years to maturity

Example:
* Buy a $1,000 face-value bond for $750 with a 10-year term. Annual accretion = ($1,000 − $750) / 10 = $25 per year.
Note: This linear approach applies to basic accretion accounting (e.g., for zero-coupon bonds). For precise yield comparisons, use yield-to-maturity or internal rate of return, which account for compounding and timing of cash flows.

Examples

Bonds:
* Purchase a $1,000 bond for $750 and hold to maturity: the bond accretes to $1,000 and pays the difference plus any periodic interest if applicable.
* Zero-coupon bonds are purchased at a discount and pay the full face value once at maturity; the increase is the accreted value.

Acquisitions:
* Simplified illustration: if Company A’s EPS is $2.00 and after acquiring Company B the combined pro forma EPS becomes $2.50, the transaction is accretive (pro forma EPS > pre-deal EPS).
* Real assessments require accounting for deal financing and share issuance—issuing new shares to fund a purchase can offset or reverse accretion.

Accretive vs. Dilutive

• Accretive: Transaction or investment increases per-share metrics (commonly EPS).
• Dilutive: Transaction or investment decreases per-share metrics.

Conclusion

Accretive describes incremental value growth—either through discounted securities that rise to par over time or transactions that increase an acquirer’s per-share metrics. Determining accretion in practice requires examining purchase price, financing method, and the deal’s impacts on shares and earnings.