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Understanding EBITDA: Limitations of EBITDA

While EBITDA is a valuable metric, it is not without its limitations. Startup entrepreneurs should be aware of the following:

1. Ignores Capital Expenditures: EBITDA does not consider capital expenditures required to maintain or expand a company's operations. For startups, this can be a critical oversight since they often reinvest heavily in their business.

2. Excludes Non-Cash Charges: EBITDA overlooks non-cash expenses like stock-based compensation, which can be significant for startups compensating employees with equity.

3. Debt Obligations: Ignoring interest expenses can lead to an incomplete picture, especially when assessing a startup's ability to service its debt.

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