How is market capitalization calculated?

Market capitalization is calculated by multiplying the current share price of a company's stock by the total number of its outstanding shares. This metric provides a direct way to gauge the total value of a company as perceived by the stock market. It reflects how much investors are willing to pay for a share in the company, providing insight into the firm's size, growth potential, and overall market context.

Using this calculation allows investors and analysts to compare companies of different sizes within the same industry or to assess market trends. A higher market capitalization typically suggests that a company is well-established and is perceived positively by investors, while a lower market cap may indicate a smaller company with potentially more volatility.

The other options presented refer to different financial metrics and do not reflect how market cap is specifically determined. For example, adding debt to equity focuses on the company's capital structure rather than its market value. Dividing total assets by total liabilities gives the debt-to-equity ratio, a measure of financial leverage rather than market capitalization. Assessing net income relates to profitability, which, while important, does not affect the calculation of market capitalization directly. Thus, the method of multiplying share price by the number of outstanding shares remains the definitive way to evaluate market capitalization.