Which of the following is a limitation of EBITDA?

The correct answer identifies a key limitation of EBITDA, which is that it does not account for capital expenditures or changes in working capital. EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a measure that reflects a company's operating performance by focusing on earnings generated from core business activities without considering how much money is being spent on long-term assets like property and equipment, as well as short-term liquidity needs related to working capital.

By neglecting capital expenditures and working capital changes, EBITDA can present a skewed picture of financial health. For instance, a company might show robust EBITDA figures, indicating healthy operational performance, but if it is simultaneously facing significant capital costs or requiring substantial investment in working capital, the reality of its cash flows and overall sustainability could be much less favorable.

Understanding this limitation is crucial for investors and stakeholders, as it necessitates a more comprehensive analysis that includes capital-related expenditures, ensuring a complete view of the company's financial situation. This aspect differentiates EBITDA from metrics that consider the total costs associated with operating a business.