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Cameron England is a business reporter with more than 20 years of experience covering Australian business, ASX-listed companies, corporate governance, and financial markets. His reporting focuses on mining, energy, biotechnology, and personal finance, with a particular interest in helping everyday investors better understand the companies and industries shaping the Australian economy.
Areas of expertise
Mining and energy
Biotechnology
Personal finance
Wine
Education
Bachelor of Arts, Graduate Diploma in Journalism, Graduate Certificate in Applied Finance, AICD Company Directors Course
“The stock market is a device for transferring money from the impatient to the patient.”
— Warren Buffett
Published
Occasionally running the ruler over some of the smaller companies listed on the ASX is a good idea to ensure you're not missing out on good opportunities.
I'm a fan of small to medium sized companies, with a strong preference towards those with growing revenue, rather than pre-revenue companies looking to launch a product or service.
Image source: Getty Images
Why consider ASX small-cap companies?
There are plenty of reasons to look outside the S&P/ASX 200 Index (ASX: XJO) for value, and the first one is the potential for high returns.
Smaller stocks are sometimes overlooked by brokers or fund managers, and in many cases fund managers are limited by their mandates as to what they can actually invest in.
While this is as much an argument as to why small caps can be undervalued and perhaps should be avoided, when they do catch the eye of market watchers, they can rerate quite handily.
Smaller companies also have the ability to scale quickly in niche areas which might be overlooked by, or be too small for, larger companies.
There's also the opportunity for takeovers, with smaller companies naturally easier to absorb.
Small end of town underperforming over the past year
Investing in smaller companies is obviously not a fool proof investing theory – those don't exist.
To prove that point, the S&P/ASX Small Ordinaries Index (ASX: XSO) is down 11.09% over the past 12 months compared with a 2.27% rise for the ASX 200 over the same period.
In order to try and filter out some companies which might provide some outsized gains at the smaller end of the market, I selected first for growing revenue, and then for zero debt at the end of the FY26 financial year, excepting current liabilities such as leases.
I've come up with four pretty diverse companies which look interesting from a growth profile.
Cogstate provides cognitive testing mainly for clinical trials of central nervous systems conditions, and recently announced a strong business update to the market.
The company on 12 October reported that its September quarter revenue had come in at US$25.1 million, up 11.4% over the same period the previous year.
The company said it was winning market share in the mood disorder space, including winning five competitive tenders for Phase 3 clinical trials.
Cogstate's contracted revenue for this financial year is 45% higher than the previous year at US$56.8 million it said, and its forward contracted revenue out to FY33 is up 39%.
The company is debt free, but also pays a small dividend yield of 1.22%, and trades on a price-to-earnings (P/E) ratio of 34.3.
While it predates the earnings upgrade, Morgans on 25 September issued a price target of $4.07 on Cogstate, compared with $3.28 at the time of writing.
SKS is an example of the opportunity to buy into a small company which fits into a larger thematic.
In this case, it's data centre roll outs, with SKS an electrical contractor which works for data centre companies such as NextDC Ltd (ASX: NXT).
Not surprisingly, the company's shares fell sharply when NextDC announced issues getting power to its M3 Melbourne site recently, but SKS later clarified it had substantially finished its works at the project.
SKS then reaffirmed its FY27 guidance of about $500 million in revenue and $60 million in pre-tax profit.
This would be a massive uplift from the $347.9 million in revenue it booked in FY26, which was itself a 33% increase.
The pre-tax profit would also be a sharp increase on last year's $39.4 million.
The recent plunge in the SKS share price from $11.55 to just $5.59 at the time of writing seems overdone, and with a trailing P/E ratio of 23.9, if you have faith in the stability of the data centre sector, I'd argue this is an interesting company to watch.
It is debt-free and pays a trailing dividend yield of 1.8%.
This company is actually not a bad earner on dividends alone, paying a trailing yield of 3.7%, fully franked.
The engineering company's revenue growth last financial year was nothing to write home about, increasing just 2.9% to $493.2 million.
But where it gets interesting is this year's projected revenue, expected to be a whopping $825 to $850 million.
The company said while releasing its full-year results on August 24 that more than 90% of that revenue was already secured, with the rest expected from minor works and studies.
GR Engineering also raised an extra $100 million in equity recently, which was well-supported by institutional investors.
With so much revenue already locked in, the company is very well-placed, and there's plenty of the financial year left for new contract wins.
GR Engineering is debt free, and was also added to the S&P/ASX 300 Index (ASX: XKO) in its September rebalance.
If you've ever seen an injured footballer sucking on a "green whistle" while being stretchered off the field, you're aware of this company's main product.
MVP makes Penthrox, better known as the green whistle, and is looking to take the device to the world.
Last year's numbers were modest, a net profit of $600,000, up from $100,000, on revenue of $42.6 million, up 9%.
But the company did book 28% volume growth for Penthrox in the Australian hospital segment and 18% growth in the European market.
MVP has won approval for wider use across age groups in the UK and Europe, and is expecting to see growth as a result.
While it's dated, Bell Potter in a research note in August had a price target of $1 on MVP shares compared with 41.5 cents at the time of writing.
The company is debt free and valued at $45 million.
