What limitation does EBITDA have as a measure of cash flow?

EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, has a notable limitation in that it does not account for changes in working capital. Working capital, which reflects the short-term liquidity of a business, includes current assets and current liabilities. When a company experiences fluctuations in working capital — for instance, changes in inventory levels, accounts receivable, or accounts payable — these factors directly impact the actual cash flow available to the business.

Since EBITDA focuses more on operating performance and profitability rather than cash flow, it overlooks these essential components of cash management. As a result, relying solely on EBITDA for evaluating cash flow could lead to an inflated perception of a company's financial health, especially if significant amounts of cash are tied up in working capital. Understanding this limitation is crucial for investors and analysts as they seek to gain an accurate picture of a company's cash flow situation.

Other options, while potentially valid in different contexts, do not represent key limitations of EBITDA in measuring cash flow accurately. For instance, capital expenditures and non-recurring charges can be essential in financial assessments, but they do not fundamentally undermine EBITDA's role in reflecting operational earnings. Similarly, while EBITDA may sometimes appear higher than cash flow from operations, this discrepancy