Accurate capacity estimation is critical for ensuring the safety and longevity of lithium-ion batteries. This paper systematically analyzes the applicability of health indicator (HI)-based capacity estimation methods throughout the life cycle of lithium-ion batteries. This paper begins by explaining the principle of HI-based capacity estimation methods and using interval capacity as an example. Then, the half-cell open-circuit potential (OCP) model is introduced to analyze different capacity degradation modes, including loss of lithium-ion inventory (LLI) and loss of active material (LAM). The research finds that the applicability of HI-based methods is influenced by factors such as the initial capacity of electrodes, the initial lithium-ions, and the degradation rates of the electrodes. During the normal aging stage, the capacity loss is mainly composed of LLI and LAM of positive electrode, allowing HI-based methods to provide accurate estimates. However, in the later stages, accelerated capacity decay due to LAM of the negative electrode and the disappearance of characteristic intervals for HI extraction can lead to algorithm failure. What’s more, excessive initial lithium-ions can also have an impact on capacity estimation results in the early stages of aging. This comprehensive analysis provides valuable insights into the limitations and potential improvements of HI-based capacity estimation methods for lithium-ion batteries.