Accretion and dilution, explained simply

Accretion/dilution analysis answers a narrow but important question: after an acquisition, does the acquirer's earnings per share go up or down? If it rises, the deal is accretive; if it falls, it is dilutive.

The mechanics are to combine the two companies' net incomes, adjust for the cost of the financing used — new interest on debt, or new shares issued in a stock deal — and divide by the acquirer's post-deal share count. Compare that pro forma EPS to the standalone figure.

A useful rule of thumb: paying with cheap financing relative to the target's earnings yield tends to be accretive, while issuing expensive equity to buy a lower-earning business tends to be dilutive. Interviewers like when you can reason to the answer rather than only compute it.

Accretion alone does not make a deal good — a company can boost EPS with a value-destroying acquisition financed by cheap debt. Flagging that distinction shows you see past the mechanics.