What financial indicator helps assess a company's ability to pay its interest obligations?

The Times Interest Earned (TIE) ratio is a crucial financial indicator used to evaluate a company's ability to meet its interest obligations. This ratio measures how many times a company can cover its interest expenses with its earnings before interest and taxes (EBIT).

A higher TIE ratio indicates that a company has a substantial cushion to pay interest, which reflects strong financial health and lower default risk. Essentially, it shows how easily a company can meet its interest payments from its operating income.

For example, if a company has an EBIT of $100,000 and interest expenses of $25,000, the TIE ratio would be 4. This means the company's earnings are four times higher than its interest obligations, suggesting it is in a relatively safe position regarding its debt.

The other indicators mentioned have different focuses; the Debt Coverage Ratio looks at the broader ability to cover all debt obligations, Dividend Yield assesses the return on investment in terms of dividends relative to share price, and Weighted Average Cost of Capital calculates the average rate of return a company is expected to pay its security holders to finance its assets, which does not directly assess the ability to pay interest.