There are a number of different ways to value whether a business is a cheap ASX share. I think that using a company's projected profit is one of the easiest ways, as well as its price/earnings (P/E) ratio which compares the share price to the earnings.
However, profit may not be a perfect tool to measure businesses. Certainly, it's possible to massage profit to make it look better than it really is.
For example, businesses could capitalise and depreciate their research and development costs, spreading the costs, in accounting terms, over a number of years, rather than accounting for them all in the first year. This can boost how good profit looks in the short term.
Indeed, it's worth knowing what a tech company's policy with this is because different companies take different approaches.
Businesses can also decide to not pay for any marketing in the last month of the year, boosting profits. But that could be bad for long-term performance.
Keeping that warning in mind, there are some smaller ASX shares that seem so cheap that they could be good investments.
Dusk Group Ltd (ASX: DSK)
Dusk is an ASX retail share with a market capitalisation of $97 million, according to the ASX.
It sells a variety of home fragrance products including candles, ultrasonic diffusers, reed diffusers, essential oils, and fragrance-related homewares.
First, let's point out that the business had no debt and $32.9 million net cash at the end of the FY23 first half. That cash makes the company's P/E ratio look even cheaper, and can enable attractive shareholder payments like dividends and share buybacks.
It is projected to pay very large dividends according to Commsec. Dusk could pay a grossed-up dividend yield of 12.8% in FY23 and 16.5% in FY25.
The cheap ASX share is expecting to keep adding new stores to its store network. This boosts its potential customer reach and, hopefully, scale and overall profitability.
According to current Commsec estimates, it's valued at 8x FY23's estimated earnings and 6x FY25's estimated earnings.
While it may not be the highest-quality business in the world, I think its cash pile, high dividend yield, and low valuation make it an appealing idea in this uncertain time for retail.
Aeris Resources Ltd (ASX: AIS)
I think Aeris is one of the most compelling smaller ASX mining shares around.
It's known as a copper miner, with operational projects and a promising growth portfolio.
I think copper has a good future considering the amount of electrification that is likely to happen in the coming years with electricity grids around the world, electric vehicles, batteries, renewable energy generation, and so on.
Copper prices don't need to soar for this cheap ASX share to do well, in my opinion.
As projects come online, profitability is expected to increase as development costs end and mine cash flow starts being produced.
By FY25, the business is projected to be producing 17.3 cents of earnings per share (EPS). This puts the current Aeris Resources share price at just 4x the FY25 estimated earnings.
If Aeris were to pay a dividend with a payout ratio of just 50%, that would be a dividend yield of 12.9%, and 18.4% grossed-up if those dividends were fully franked. Later this decade, I think this business could be an attractive dividend payer.
