Judgment Case 145 (Static) Analyzing financial statements; financial leverage; interest coverage [LO141, LO144]

AGF Foods Company is a large, primarily domestic, consumer foods company involved in the manufacture, distribution, and sale of a variety of food products. Industry averages are derived from Troys The Almanac of Business and Industrial Financial Ratios. Following are the 2021 and 2020 comparative income statements and balance sheets for AGF. (The financial data we use are from actual financial statements of a well-known corporation, but the company name is fictitious and the numbers and dates have been modified slightly to disguise the companys identity.)

AGF FOODS COMPANY
Years Ended December 31, 2021 and 2020
($ in millions)
Comparative Income Statements	2021				2020
Net sales	$	6,440			$	5,800
Cost of goods sold		(3,667	)			(3,389	)
Gross profit		2,773				2,411
Operating expenses		(1,916	)			(1,629	)
Operating income		857				782
Interest expense		(54	)			(53	)
Income from operations before tax		803				729
Income taxes		(316	)			(287	)
Net income	$	487			$	442
Comparative Balance Sheets
Assets
Total current assets	$	1,879			$	1,490
Property, plant, and equipment (net)		2,592				2,291
Intangibles (net)		800				843
Other assets		74				60
Total assets	$	5,345			$	4,684
Liabilities and Shareholders Equity
Total current liabilities	$	1,473			$	941
Long-term debt		534				728
Deferred income taxes		407				344
Total liabilities		2,414				2,013
Shareholders equity:
Common stock		180				180
Additional paid-in capital		21				63
Retained earnings		2,730				2,428
Total shareholders equity		2,931				2,671
Total liabilities and shareholders equity	$	5,345			$	4,684

Long-term solvency refers to a companys ability to pay its long-term obligations. Financing ratios provide investors and creditors with an indication of this element of risk. Required: 1. Calculate the debt to equity ratio for AGF for 2021= 0.82 2. The average ratio for the stocks listed on the New York Stock Exchange in a comparable time period was 1.0. Other things being equal, does AGF appear to have higher or lower default risk than others in its industry? 3. Is AGF experiencing favorable or unfavorable financial leverage? 4. Calculate AGFs times interest earned ratio for 2021.=15.9 5. The coverage for the stocks listed on the New York Stock Exchange in a comparable time period was 5.1. Other things being equal, does AGF appear to have higher or lower interest coverage than others in its industry?