What is Accretive?
Let me explain what accretive means in finance and everyday terms. It's the adjective form of 'accretion,' which describes gradual or incremental growth. For instance, if a company absorbs another through an acquisition and that boosts its earnings per share, you'd call the deal accretive.
By definition, in corporate finance, accretive acquisitions of assets or businesses have to add more value to your company than what you spent on them. This happens if you buy the assets at a discount to their current market value or if they're set to grow directly because of the deal.
Key Takeaways
- The term 'accretive' is an adjective that refers to business deals that result in gradual or incremental growth in value for a company.
- In corporate finance, accretive acquisitions of assets must add more value to a company than the costs of acquiring the target entity.
- Accretive deals can occur if acquired assets are purchased at a discount to their perceived current market value.
- In general finance, accretive investments refer to any security that is purchased at a discount.
Breaking Down Accretive
In general finance, accretion means the change in a bond or security's price. For fixed-income investments, accretive describes the value increase from accrued but unpaid interest. Take discounted bonds—they earn interest through accretion until maturity. You buy these bonds at a discount compared to their face value, or par, and as they mature, their value rises based on the interest rate at issuance.
Determining the Rate of Accretion
You determine the rate of accretion by dividing the discount by the number of years in the term. For zero-coupon bonds, the interest isn't compounded. The bond's value increases based on the agreed interest rate, but you have to hold it for the full term before cashing out.
Examples of Accretion
Suppose you buy a bond worth $1,000 at a discounted price of $750, and you plan to hold it for 10 years. This is accretive because the bond repays your initial investment plus interest. Depending on the bond type, interest might come at regular intervals like annually or semi-annually, or in a lump sum at maturity.
With zero-coupon bonds, there's no interest accrual—instead, you buy at a discount, like $750 for a $1,000 face value bond. It pays the full $1,000, the accreted value, in a lump sum when it matures.
In corporate finance, acquisition deals are often accretive. Say Corporation X has earnings per share of $100, and Corporation Y has $50. If X acquires Y, X's earnings per share jump to $150—that's a 50% accretive deal.
Remember, the opposite of accretive is dilutive, which is any deal that drops a corporation's earnings per share value.
