Ask Colin

To calculate the total capitalisation of a company, should I include unlisted shares?

My answer would be yes. The capitalisation of a company is the number of shares issued by the company multiplied by the market value of the shares. If the shares exist, and will be tradeable for certain in the future, then I think they form part of the capitalisation. Even if they do not become tradeable until some time in the future, unless there is a mechanism to cancel them, they will dilute the interest of existing listed shareholders at that future time. The market normally prices shares assuming they will be listed, where this is reasonably certain.

This is more important in using EPS to value a company than it is in just calculating its total capitalisation for purposes such as its relative size. Analysts will calculate what they call a "fully diluted" EPS, which takes into account any potential share from options, etc so long as there is reasonable certainty that they will later become shares.

The ASX is now moving towards basing their indexes on the "free float" rather than the total capitalisation. Thus, where shares are restricted or tied up in some way, they will not be used in capitalisation weighting for the indexes. This has nothing to do with the real size or EPS for a company. However, it underlies the point that we must consider the use we are making of the data in each case and treat it appropriately. There will be different answers for different applications.