What is Accretion or Accretive?

June 26, 2022
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If JLR (Jaguar Land Rover) shows some profit in the Profit and Loss account then It will be an accretive growth for Tata Motors. It won’t show an immediate increase in the slope of Tata Motors but will show over a long period of time.

The progressive and incremental growth of assets and profits as a result of industrial development, internal firm growth, mergers, or acquisitions is known as accretion.

Application of accretive growth

Accretive growth has many meanings but in finance, it is usually co-related with two terms which are as follows:

Bonds – Accretive is the profit you make when you purchase a bond at a lower price.

The value you produce when you combine with or buy another company is known in corporate finance as accretion. As a result, the value of your stockholders’ shares rises, boosting your earnings per share (EPS).

Accretive for Investors

Have you ever noticed Financial Statements particularly Standalone and Consolidated?

If you ever wondered what these terms mean, then in the para you would be cleared through this confusion.

Standalone is for the company’s core and consolidated is for the company’s subsidiaries. Let’s say Tata Motors has showrooms in Delhi, Mumbai, and Uttar Pradesh then all the profits from all these showrooms will be calculated under standalone but profit from JLR-Delhi, JLR-Mumbai will be calculated under the consolidated particulars which are result in accretive growth of Tata Motors.

Breaking down Accretive

In terms of corporate finance, accretion refers to the value gained via organic growth or after a deal has been completed. This may be due to the purchase of newer assets at a discount or at a cost that is significantly below their CMV (current market value). It can entail buying assets whose value is anticipated to rise as a result of the transaction.

In the securities market, acquiring bonds at a price less than their face value is known as “buying at a discount,” while doing so at a price higher than their face value is known as “buying at a premium.”

In the realm of finance, accretion equalizes the cost basis between the purchase price (discount) and the anticipated redemption amount at maturity. For instance, if a bond is purchased for an amount that is 80% of its face value, the accretion in this instance is 20%.