In an acquisition, when is it considered accretive to earnings?

In an acquisition, a transaction is considered accretive to earnings when the buyer's earnings yield is higher than the seller's earnings yield. This means that the earnings generated by the acquisition contribute positively to the buyer's overall earnings per share (EPS).

Earnings yield is calculated by taking the earnings of a company and dividing it by its market price per share. When the buyer's earnings yield surpasses that of the seller, it indicates that the buyer is acquiring assets that provide greater earnings relative to their price, thus enhancing its overall profitability. In this scenario, the additional earnings from the acquisition will increase the buyer's EPS, making the acquisition accretive.

The context of this concept is crucial because it underscores the strategic considerations during mergers and acquisitions, where buyers aim to improve their valuation and performance metrics by targeting companies that deliver superior financial returns relative to their costs.