Why these small cap ASX shares could rise 85%+

Analysts at Morgans think these small caps are top options right now with big potential returns. But why?

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For investors that have a high risk tolerance, it could be worth considering some small cap ASX shares for your portfolio.

That's because the returns on offer at the small side of the market can be material. But which small caps could offer a compelling risk/reward?

Listed below are two small caps that analysts at Morgans are bullish on right now. Here's what they are saying about them:

AVITA Medical Inc (ASX: AVH)

AVITA Medical could be a small cap ASX share to buy. It is a regenerative medicine company with a focus on wound care management and skin restoration with its RECELL technology.

A new version of this technology was granted FDA approval recently, which bodes well for the future. Especially given its significant market opportunity across various treatment areas.

Commenting on its market opportunity, Morgans said:

AVH is a regenerative medicine company focusing on the acute wound care market. It has recently expanded its indication into full thickness skin defects and Vitiligo (US$5bn TAM). The expanded indication in full thickness skin defects has the required reimbursement in place and sales have started.

The broker also described the recent FDA approval as a significant milestone. It adds:

AVH has received FDA approval for its automated product, RECELL Go, for use in burns and full thickness skin defects. This approval marks a significant milestone for the company, with management expecting this device to increase adoption of the technology amongst clinicians. We have made no changes to our forecasts and recommendation.

Morgans has an add rating and $5.60 price target on its shares. Based on the current AVITA Medical share price of $2.86, this suggests that the company's shares could rise 96%.

Tyro Payments Ltd (ASX: TYR)

Another ASX small cap share that could be in the buy zone according to Morgans is Tyro Payments.

It is a payments provider with approximately 70,000 merchants on its network. This makes it Australia's fifth largest merchant acquiring bank by number of terminals in the market.

Morgans notes that its shares have been under pressure recently and believes this has created a buying opportunity for investors. It said:

TYR sold off heavily in 2023 affected by the broad pull back in technology stocks and overall concerns regarding its earnings trajectory. However, we believe FY24 will show significantly improved business momentum, importantly driven by a much greater focus on lifting overall profitability. TYR still trades at a significant discount to valuation.

Morgans has an add rating and $1.47 price target on its shares. Based on the current Tyro share price of 79 cents, this implies potential upside of 86% for investors.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Avita Medical and Tyro Payments. The Motley Fool Australia has recommended Avita Medical and Tyro Payments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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