What is Accretive?

In both finance and in general lexicon, the term "accretive" is the adjective form of the word "accretion", which refers to gradual or incremental growth. For example, an acquisition deal may be deemed accretive for the absorbing company, if that deal contributes to an increase in earnings per share.

By definition, in corporate finance, accretive acquisitions of assets or businesses must ultimately add more value to a company, than the expenditures associated with the acquisition. This can be due to the fact that the newly-acquired assets in question are purchased at a discount to their perceived current market value, or if the assets are expected to grow, as a direct result of the transaction.

Key Takeaways are 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. 

In general finance, accretion refers to the change in the price of a bond or security. In fixed-income investments, the word accretive may be used to describe the increase in value attributable to interest accrued but not paid. For example, discounted bonds earn interest through accretion, until they reach maturity. In such cases, acquired bonds are acquired at a discount when compared to the current face value of the bond, also known as the par. As the bond matures, the value increases, based on the interest rate that was in effect at the time of issuance.

The rate of accretion is determined by dividing the discount by the number of years in the term. In the case of zero coupon bonds, the interest acquired is not compounded. While the value of the bond increases based on the agreed-upon interest rate, it must be held for the agreed-upon term, before it can be cashed out.

If a person purchases a bond with a value of $1,000, for the discounted price of $750, with the understanding that it will be held for 10 years, the deal is considered accretive, because the bond pays out the initial investment, plus interest. Depending on the type of bond purchased, interest may be paid out at regular intervals (annually, semi-annually, etc.), or it may be paid in lump sum, upon maturity.

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