What is Accretion?
Definition – Accretion is a way of measuring the growth of your business over time through the addition of new assets (and sometimes the loss of assets). Accretion offers many strategic benefits to a business owner, but it can also be challenging to understand in some cases.
Examples of Accretion in a Sentence
- The brick wall is constructed of rocks formed by the slow accretion of limestone.
- Banks are struggling with the accretion of non-performing loans.
The first known use of accretion
The first known use of accretion was around the year 1615. The word has a long history, and it’s been used in many different ways.
Accretion is your company’s gradual and incremental growth through acquisitions, internal growth, and public stock offerings (for public companies). Accretion can also involve publicly reported data such as net income or earnings per share and other numbers used by financial analysts to measure growth over time.
This definition clearly distinguishes accretion from other types of growth because it quantifies what is happening to the company rather than just economic indicators such as revenues or profits. Thus, accretion accounts for the difference between sales and profits and ongoing costs of growth.
Bond Accretion (Finance)
In finance, accretion, or incremental returns, is the concept of buying income-producing securities, usually bonds, at a lower price than the market would suggest and holding them until maturity. The beneficial result of accretion is that losses are spread over more time so that total losses do not exceed principal by as much. Bond accretion is a method of assessing the value of zero-coupon bonds over their term. It is commonly used for equities, commodities, and options, although it can also be applied to real estate or fixed-income securities.
For example, if you buy a house for $200,000 and spend three years living in it, then after 20 years, the house is worth $300,000. If you had sold the house immediately after buying it, instead of waiting until it matures and then selling it at a higher price (which increases your cash flow), then you would have received $150,000 cashback for the three years that you lived in the house.
Earnings Accretion (Accounting)
Earnings accretion is how much a company grows its earnings when the market is flat or falling. Accounting EPS is how much a company increases its earnings on average when the market is growing rapidly. Accretion and average are often used interchangeably, though there are important differences between the two. On average, large firms generate slightly more than small firms; however, large firms generally have more debt than small firms and have much lower free cash flow. The term earnings accretion refers to an increase in a firm’s earnings-per-share ratio resulting from a merger, acquisition, or consolidation.
Examples of Accretion
If the new company paid out $2 million in cash to shareholders, earnings to book value would be about $1 million. With a 50% discount, shareholders earn an average of $650 million on their new stock. But assume instead that the new company gives all $2 million to its stockholders as a dividend. Book value would then be about $650 million – and in this case, the new company would have nearly twice as much money as it would have had if it hadn’t reorganized!
Example 2: Let us assume that the earnings per share of company A are listed as $100, and earnings per share of Company B are listed as $50. When Company A acquires Company B, Company A’s earnings per share increase to $150; this deal is 50% accretive due to the rise in value.
Accretion can reflect either a positive or a negative impact on a company’s financial performance. For example, accretion can increase earnings if the business can take advantage of an expanding market or new technology but can reduce earnings if the business has to pay off debt or expands into new geographies at a slower rate.
There is no set formula for accretion. The rate of increase can vary from day to day, quarter to quarter, and even year to year within a company. Investors can dictate the pace of accretion by increasing or decreasing their investment during good times and holding it at levels seen as safe during bad times.