What is Accretive?
To be accretive is to increase earnings per share.
How Does Accretive Work?
This term is most often used in the context of acquisitions. Let's assume Company XYZ has EPS of 25 cents this year. Next year, it acquires Company ABC. The cost of the acquisition in per share terms is 10 cents, but when Company XYZ combines the operations and profits of Company ABC in with its own, this adds 12 cents per share. Company XYZ comes out 2 cents per share ahead, meaning the acquisition is accretive to earnings.
Generally, an acquisition is accretive if the acquirer's price/earnings ratio is higher than the target's price/earnings ratio. Theoretically, the target in this case is a relative bargain for the acquirer.
Why Does Accretive Matter?
Accretion is a good thing for companies because it adds to the bottom line and thus increases shareholder value, which is the goal of every company. Of course, not all acquisitions turn out to be accretive, despite all the forecasts saying so. Accordingly, the manner in which an acquirer integrates a target into its operations is key to ensuring that the expected gains materialize.
