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The word "accretive" comes from the Latin word "accretio", which means "growth by addition". Adding value to an existing asset or company is referred to as being accretive in business.
For instance, an accretive purchase is one that raises the acquiring company's earnings per share (EPS). An investment that produces a better return than the cost of capital is said to be accretive. A method that raises the effectiveness or caliber of an enterprise is accretive.
Businesses must understand the idea of accretive since it shows whether they are adding value for their stakeholders and shareholders. A company's market value can rise thanks to accretive measures, which can also strengthen its competitive edge, boost profitability, and improve cash flow. By broadening its sources of income, growing its clientele, or enhancing its brand, accretive measures can also help a business lower its risk.
How can businesses achieve accretion?
There are many ways that businesses can achieve accretion, depending on their industry, size, and goals. Some of the common methods are:- Mergers and acquisitions (M&A): This occurs when one business purchases or merges with another business, whether they are in the same or a different industry. If the combined business has more synergies, lower costs, higher Earnings, or more growth potential than the separate entities, M&A may be accretive.
- Organic growth: This occurs when a business develops new goods or services, enters new markets, boosts its market share, or increases client loyalty in order to increase revenue and earnings. Organic growth might be accretive if it brings in more money than the necessary investment.
- Capital allocation: This is how a business chooses to spend its available cash or debt. If capital is allocated to projects with a positive net present value (NPV), or those that produce more cash flow than their initial cost, it can have an additive effect. In contrast, capital allocation can be accretive if it is utilized to make dividend payments or buy back shares, which can raise a company's EPS and share price.
- Innovation: This occurs when a business develops brand-new or enhanced goods or services that outperform those of its rivals in satisfying the demands or desires of its clients. Innovation can increase profits if it increases margins, market share, and customer retention while also increasing referrals and customer pleasure.
- Operational excellence: In order to offer goods or services quicker, more affordably, and more effectively than rivals, a corporation must optimize its procedures and systems. If operational excellence boosts productivity, quality, and customer satisfaction while decreasing waste, errors, defects, and delays, it can be profitable.
What are some examples of accretive businesses?
Some examples of accretive businesses are:- Apple: Apple is known for its innovation and design of products such as the iPhone, iPad, Macbook, Apple Watch, AirPods, and more. Apple's products have high levels of customer fidelity, demand, profitability, and market share. A robust ecosystem of services is also available from Apple, including iTunes, iCloud, Apple Music, Apple TV+, Apple Pay, and others. Due to its accretive strategy of generating value for both consumers and shareholders, Apple has steadily increased its sales and EPS over the years.
- Amazon: Amazon is well-known for its e-commerce site, which offers millions of items in a range of categories, including books, electronics, apparel, food, and more. Low costs, quick delivery, and practical features like Alexa voice assistant, Prime membership, and more are all available on Amazon's marketplace. Additionally, Amazon has a variety of businesses, including the Kindle e-reader, the Audible audiobook service, the AWS cloud computing service, and more. Due to its accretive approach to growing both its product offerings and client base, Amazon's revenue and Earnings have increased significantly over the years.
- Starbucks: Starbucks is well recognized for its coffee shops that provide premium coffee beverages and other items in a welcoming and cozy setting. Customers who frequent Starbucks coffee shops frequently spend more money per visit than they do at other coffee businesses. Starbucks offers additional outlets as well, including packaged coffee items offered in supermarkets, a mobile ordering and delivery service, and more. Because to its accretive strategy of improving customer experience and loyalty, Starbucks' revenue and EPS have increased continuously over the years.
