The question asks how ethnocentrism limits our understanding of other cultures. Let’s start with a good definition of ethnocentrism. Merriam-Webster defines it in terms of the condition of being ethnocentric, which in turn is defined as “having or based on the idea that your own group or culture is better or more important than others”.
The definition really sums up the problem. The concept of “understanding” supposes a certain level of objectivity and openness to new ideas. Having an a priori assumption that one’s own culture is superior interferes with this on several levels. At one extreme, belief in the superiority of one’s own ideas can lead to an intellectual isolationism, that is, that other cultures are not even worth finding out about. Following on the concept of a spectrum, the next level is the one at which the ethnocentric person investigates other cultures, but simply rejects the validity of differences in that culture.
Moving along, the ethnocentric person who is perhaps less secure in their belief in their own cultural superiority will investigate other cultures, but will be always assessing differences with an eye toward determining the ways in which that other culture is inferior. That is, they are looking for validation of their own ethnocentrism. They will take in facts about that culture, then restate them (i.e. misunderstand them) in judgmental terms to assert the inferiority of that culture. This is where negative stereotypes of that culture come in (“the -----s are lazy”, the “the -----s are devious”, etc.). Cultural elements will be filtered, so that those that fit the stereotype are noticed, and those that contradict it are ignored.
Ultimately, true understanding requires a relatively complete lack of judgment. After true understanding is achieved, the person can then apply their value system to what they understand to determine whether some cultural element is “good” or “bad”.