Additionally, the risk factor is something to take into consideration. Firms that have very high debt ratios are not only closer to insolvency, but because they are riskier will also have higher borrowing costs. There is little to choose form in terms of solvency between these companies, but the higher debt ratio at Microsoft will ultimately be better for investors because more of their money is returned in the form of profits. All told, Google is the better investment, because the company has more upside than does Microsoft. This comes down to Google's management style and its innovation track record. Because Google's key innovations are more recent than Microsoft's, and because Google seems to be more oriented towards innovation today, it is expected that Google will outperform Microsoft in the future with respect to introducing new businesses. These new businesses are not yet priced into the companies' stock prices, whereas the existing businesses are. Thus, the investor is looking to put money in today in the hopes that the company will be able to improve its growth prospects in the future. That is more likely with Google, making Google the better investment. Microsoft is still a good investment, largely because of the safety afforded to investors via the company's dividends. Indeed, although investor expectations are for relatively low capital gains compared to Google, that so much of Microsoft's earnings are paid out in dividends right away means that the total return one can expect from investing...

However, current dividends are priced into Microsoft's stock already, as is expected future dividend growth.
Appendix: Key Ratios

Google

Microsoft

Current Ratio

5.9

2.6

ROA

14.9%

22.9%

ROE

18.66%

41.68%

Debt Ratio

19.9%

47.4%

Fixed Asset Turnover

3.9x

8.6x

Dividend Payout Ratio

0

23.7%

P/E Ratio

20.33

11.43

Works Cited:

Alexa.com. (2012). Top sites. Retrieved March 7, 2012 from http://www.alexa.com/topsites

BBC. (2010). Google stops censoring search results in China. British Broadcasting Corporation. Retrieved March 7, 2012 from http://news.bbc.co.uk/2/hi/business/8581393.stm

Google 2011 Form 10-K. Retrieved March 7, 2012 from http://www.sec.gov/Archives/edgar/data/1288776/000119312512025336/d260164d10k.htm#toc260164_11

Microsoft 2011 Annual Report. Retrieved March 7, 2012 from http://www.microsoft.com/investor/reports/ar11/docs/2011%20Annual%20Report.doc

Yahoo! Finance: Google. (2012). Retrieved March 7, 2012 from http://finance.yahoo.com/q/ks?s=GOOG+Key+Statistics

Yahoo! Finance: Microsoft. (2012). Retrieved March 7, 2012 from http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics