Should You Follow Eric Schmidt and Sell Google Inc (GOOG) Shares?

The table below is self-explanatory. Google’s return on average assets (ROAA) of 12.71% is pretty low compared to 28.49% of Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and 20.42% of Microsoft Corporation (NASDAQ:MSFT). Its current ratio of 4.22 is pretty much in line with 4.38 of Yahoo!  and 4.21 of Baidu. Microsoft Corporation (NASDAQ:MSFT) and AOL, Inc. (NYSE:AOL) seem to be efficiently reutilizing their working capital and that shows in their high gross margins. In short, Google’s inefficient asset utilization (given by lower ROAA and higher current ratio) might be dragging the profit margin down, which will ultimately readjust the PE ratio down to the industry average of 20.

In other words, if we are looking for an alternative to Google right now, Microsoft, with its broad economic moat and strong financials seems to be the perfect choice to me.

Just on a sidenote, Facebook Inc (NASDAQ:FB) with the incredibly HIGH P/E multiple and the lowest ROAA seems to be in a dangerously bloated state to me. Facebook investors, you should watch out.

Foolish Bottom line

Google is giving mixed signals from an investor’s point of view. With not-so-impressive ratios, weak fundamentals (By “fundamentals”, I mean “business strategy, asset allocation and execution” mainly) and insider selling of shares, Google stock price is at the edge of a cliff. The only thing that can help Google maintain the present market valuation is quality earnings’ growth in the coming few quarters. If investors see enough growth, they will keep the Google shares or else, move on to better growth or dividend pastures.

And that, my friend, might result into a downslide of the stock price. Remember how Apple’s price crumbled down over the last few weeks. It’s better to be safe than sorry.

The article Should You Follow Eric Schmidt and Sell Google Shares? originally appeared on Fool.com and is written by Suman Chatterjee.

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