Accretive

Key Highlights

• Accretive refers to a situation where an action or event contributes positively to the value or earnings of a financial asset, a company, or an investment portfolio.
• The opposite of accretive is "dilutive," which indicates a negative impact on value or earnings.
• In the context of mergers and acquisitions, an acquisition is considered accretive if it adds value to the acquiring company.
• An investment is considered accretive if it enhances the overall return or value of a portfolio.

What is Accretive?

The term "accretive" is commonly used in finance and investment contexts. It refers to a situation where an action or event contributes positively to the value or earnings of a financial asset, a company, or an investment portfolio. The opposite of accretive is "dilutive," which indicates a negative impact on value or earnings.

Accretive in Different Contexts

• Mergers and Acquisitions: In the context of mergers and acquisitions, an acquisition is considered accretive if it adds value to the acquiring company. This typically means that the earnings per share (EPS) or other financial metrics improve as a result of the acquisition.
• Financial Instruments: For bonds or other fixed-income securities, accretion refers to the increase in the value of the bond over time as it approaches maturity. This increase is gradual, reflecting the adjustment of the bond's book value to its face value.
• Real Estate: In real estate, accretion can refer to the gradual increase in the value of land over time due to factors such as development, improvements, or market appreciation.
• Investment Portfolios: An investment is considered accretive if it enhances the overall return or value of a portfolio. This could result from adding assets with higher returns or undervalued securities.

Example:

Consider a company that acquires another company at a price lower than its intrinsic value. If the acquisition leads to an increase in the acquiring company's earnings or cash flow per share, it is considered accretive. This is often seen as a positive outcome, as it indicates that the acquisition has contributed to the company's financial health and shareholder value.