Definition of accretion
- accretions of grime
rocks formed by the slow accretion of limestone
There was an accretion of ice on the car's windshield.
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The slow accretion of scientific knowledge over many centuries has turned into an avalanche in our time. Any accretion of ice on a grounded jet will result in takeoff delays because of the danger it poses. The land area of the Mississippi Delta increases every year from the accretion of soil washed down the Mississippi River, though the accretions happen so slowly that it's difficult to detect any increase at all. Accretion is often used in scientific writing; its usual verb form, accrue, is more often used in financial contexts ("This figure doesn't count the accrued interest on the investments").
Accretion is growth, typically in earnings, usually after an acquisition or other significant event. In the bond world, accretion refers to the capital gains earned on a bond purchased at a discount.
Let's assume Company XYZ decides to buy Company ABC. Company XYZ's earnings per share before the acquisition are $0.15. Due to the acquisition, its earnings per share shoot up to $0.25, which makes the acquisition accretive to earnings by $0.10 per share.
In the bond world, let's assume that Jane Doe buys a 10-year bond issued by IBM. The bond has a face value of $1,000, but Jane buys it at a discount and pays $900. Over the next 10 years, Jane will see $100 of accretion on her bond ($1,000 - $900). Even though Jane doesn't actually receive the $100 until the bond matures, she must pay taxes on the accretion as it occurs over the 10 years.
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, as well as the quality of the strategic fit between the two entities, are both key to ensuring that the expected gains materialize.
Any bond purchased at a discount accretes, and knowing to anticipate and calculate this accretion can make a big difference in an investor's tax situation.
To be accretive is to increase earnings per share.
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.
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.
: a gradual process in which layers of a material are formed as small amounts are added over time
: something that has grown or accumulated slowly : a product or result of gradual growth
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