If you want to understand risky businesses at the medium- to large-scale like aquaculture today you need to understand more than just technology, biology and science to be informed about development. Research goes only so far into evaluating the financial feasibility of business success. After all, if aquaculture doesn’t succeed financially, create jobs and sustainable rural development; then, what are we doing? If you don’t make money, you’ll have to sell the farm.
At the large scale, I believe there's a lot of aquaculture fraud out there. Let’s discuss a questionable metric and financing used now to confound, confuse and hoodwink.
A “shyster” is defined as “a person who uses unscrupulous, fraudulent, or deceptive methods in business”. In my experience, aquaculture has too many of these characters, especially in the complex, capital-intensive systems which when scaled up become very risky as they have longer-term gestations. These are the “aqua-shysters”. I have direct experiences as a farm worker and a scientist with CEOs who exaggerated/lied to investors and banks to obtain funds; or, even more bizarre to me, recruited super wealthy people to actually LOSE MONEY so they could write off losses - and their gold-plated trips to a tropical paradise - and actually make more money by losing money.
I want to explain how the aqua-shysters operate and how capitalism rewards them by explaining EBITDA and their misuse of it, their raising capital by issuing debt, and associations with equity.
EBITDA is Earnings BEFORE Interest, Taxes, Depreciation, and Amortization. It is just revenue - NOT NET INCOME.
Net income is a company's earnings AFTER interest, taxes, depreciation, and amortization. EBITDA is earnings only, a company's generation of money. It does not account for how much money is spent on operating or all other essential expenses, such as the actual costs of selling products.
EBITDA is just a naming gimmick and is NOT a GAAP (Generally Accepted Accounting Principle).
EBITDA is commonly misused in risky businesses such as aquaculture to trick naïve investors into thinking that a company has better cash flow than it does. Many large-scale aquaculture companies that are not profitable now – or never will be - take on additional debt to stay in business. This additional debt is used in many cases to pay very large salaries to top management while the company loses millions but remains in business.
The aqua-shysters are experts in promises of exaggerated production goals in exaggerated far-too-short timelines and exaggerated revenues promised by inflating wholesale prices (absurdly high sales prices per kg of production). After years of losses but positive EBITDA's the aqua-shysters walk away with years of their big compensation and bonuses, leaving investors holding near worthless assets (broken and failed aquaculture buildings, tanks, pumps, etc. etc.).
EBITDA doesn’t account for expenses. This means that whether a company is financed by debt, equity, cash, or any combination of the three, their EBITDA is not affected. For example, a business that is financed mainly by debt can report a high EBITDA (high earnings), but after interest payments it could have no net income. A company can report an increased revenue (an increased EBITDA) but lose millions a year. A large-scale aquaculture company can report a doubling of revenue from EUR 9 to 18 million in a year and publicize that its EBITDA has increased, even though the company lost EUR 26 million in the year of increased revenue and lost EUR 40 million the previous year. Also, EBITDA is just revenue, and revenue can be obtained in other ways than aquaculture production. The company could have made revenue from consulting, selling equipment, trading, services, any other way. EBITDA doesn’t pay the bills, repay debt, or drive sustainable growth.
Also, beware of people who use EBITDA when considering mergers and buyouts of another company, especially so in aquaculture. When these business consolidations occur, capital restructuring is common. EBITDA is not informative in aquaculture as capital depreciation, amortization of assets, taxes, etc. are oftentimes so different between companies that are oftentimes located in far different social-political situations.
All companies need money to pay for capital and operating expenses (assets, payroll, taxes, etc.). If they are start-ups and don't generate enough cash from current production, companies need to raise capital. Companies have a choice of whether to raise capital by issuing debt or equity.
Debt can be loans or bonds. Taking on debt is risky as debt incurs both principal and interest payments. Banks have a tough time with risky businesses such as aquaculture as it's new to many, is too complex for lenders to understand, and the value of aquaculture assets that can be used as collateral are very hard to evaluate properly. Thus, banks tend to say no to aquaculture as they are not confident in their ability to pay back loans. The principal of debt is not considered an expense, but interest payments are, recorded as operating expenses on a company's income statement. Reductions on the principal are recorded as a reduction in liabilities on a company balance sheet. Interest payments are tax deductible (in the US).
Equity refers to capital raised from selling a portion of the ownership of a company to investors. Here’s where the aqua-shysters make their money. Equity is safer for a company since there is no obligation of repayment. Selling equity decreases control a business owner has in their own company; but requests for equity in large-scale aquaculture can be inflated; they can be enormous. If you have raised this huge pile of money, why would you ever want to or expect to pay it back in fish? This is where the aqua-shysters really work investors and the capitalist system – they inflate, overpromise and underdeliver - pay themselves a huge salary - then, when the business fails, sail away on their yachts to a tropical paradise.
BEWARE of the aqua-shysters - the only way to evaluate business health is a very detailed examination of - and in-depth questioning of - operational cash flow.
