Dilutive

Definition:

If a company acquires another and says the deal is 'dilutive to earnings', it means that the resulting P/E (price/earnings) ratio of the acquired company is greater than the acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say, $220,000 (P/E ratio=11 [220,000 valuation/20,000 profit]) then the deal is dilutive because company 'A' is effectively decreasing its EPS (because it now has more shares and it paid more for them in comparison with its own share price).

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