4 small caps we’re watching this reporting season

Reporting season is nearly upon us for another year. While stocks like CBA, BHP, and CSL will no doubt receive ample coverage, for those investing at the smaller end of the market, assessing results is often an individual game.

Over the last five years, the team here at A Rich Life have covered around 200 different stocks – mostly ASX-listed small caps. While we certainly won’t be covering them all in August, we should cover around 20-30 of them during reporting season and the weeks that follow. And many of them have limited coverage from brokers and fund managers.

So as I sharpen my virtual pencil, say goodbye to my family, and prepare to lock myself in my office for a few weeks, buried in spreadsheets and PDFs, these are some of the names I’m most interested in.

Paragon Care (ASX: PGC)

1. Margin recovery

Gross margins lifted to 8.8% in H1 FY 2025 (see H1 results), up from ~6% in the prior corresponding period (pcp). That’s a meaningful move in percentage terms, but still razor-thin in absolute terms. Investors will be watching closely to see if this is sustainable, or just a short-term benefit from merger synergies or procurement wins.

2. Cash flow normalisation

H1 saw negative operating cash flow of -$40.7 million after capex and lease repayments, free cashflow was -$53.6 million, despite $13.2 million in NPAT. Management pinned the weakness on seasonal factors and delayed receivables. This half should be the test case: does cash flow rebound, or are we looking at structurally weak conversion?

3. Working capital

Receivables and inventory ballooned post-CH2 merger. If those working capital pressures don’t begin to ease, it could signal deeper structural issues. Even modest improvements would go a long way to restoring investor confidence in free cash flow potential.

4. Balance sheet

Net debt stood at ~$226 million as of 31 December, with net debt to EBITDA at 2.84x. That’s manageable, but only if operating performance strengthens. The choice of ScotPac as primary lender may also reflect limited options, and any signs of covenant pressure would be a red flag.

5. More M&A?

Despite needing to digest CH2 and Oborne Health Supplies, Paragon has hinted at further acquisitions (See commentary on page 7 of FY25 Half Year Results Presentation). Investors may want to see restraint (or at least clear evidence that integration is progressing well) before the company embarks on another buying spree.

Atturra (ASX: ATA)

1. Margin pressure

Growth by acquisition looks slick, but reported EBIT margins (~10% historically) are under pressure. With new deals like Kitepipe and DalRae, can overlapping teams and integration costs be absorbed, or will margins dip further?

2. Cash conversion and capex burden

Despite strong revenue growth, operating cash flow has only been modest. $2.4 million in H1 FY 2025, $11.8 million in FY24 and $10.5 million in FY23. Once lease repayments, acquisitions (which are necessary for growth), and capex are deducted, free cashflow has been significantly negative. With ongoing acquisitions and the share‑buyback, investors should ask: are they turning revenue into reliable cash?

3. Integration of acquisitions

Recent deals like US‑based Kitepipe and Brisbane’s DalRae extend Atturra’s footprint. The fat question: Are we seeing seamless integration into a wider group, or does this become a distraction, creating execution bottlenecks and margin leakage?

IPD Group (IPG)

1. Organic growth

Statutory results in H1 FY 2025 saw a surge of 40% or more (vs pcp) across revenue, EBIT, and NPAT, but pro‑forma results, which include acquired companies, tell a different tale. Revenue inched higher, EBIT and NPAT fell. So can IPD Group produce organic growth, or is it destined to only grow by acquisition?

2. Margin dilution from acquisitions

Gross margins fell from ~40% to ~35.2% in the first half, as low-margin CMI and larger, more competitive projects drag profitability. Watch for any signs of margin recovery: if synergies don’t appear, this may be a structural drag.

3. Cash flow

H1 operating cash flow of $17.8 million and net debt cut to ~$2.2 million at 31 December 2024 (from $8.8 million a year earlier) are solid – though this excludes lease liabilities. The test will be whether this holds amid integration costs and larger order dynamics.

4. Exposure to cyclical sectors

CMI remains vulnerable to a commercial construction slowdown, while the remaining business is gaining share in data centres (+25%), EV charging, water and wastewater. Watch mix shifts: heavy reliance on cyclical sectors could add earnings volatility.

Audinate (AD8)

1. Gross profit recovery trajectory

Hardware (CCM) revenue plunged ~56% in 1H FY 2025 to US$10.1 million from US$22.7 million in the pcp (see our H1 coverage here). Management expects “moderate strengthening” in the second half, but whether profit bounces back toward FY24 levels (or merely flattens) is critical.

2. Software momentum vs hardware slump

There was a 13% uplift in software revenue (to US$8.3m), but is this just cannibalising hardware revenue? Watch for further acceleration in software value-add (e.g. Dante Director) and if that trend sticks.

3. OEM inventory de‑stock timing

The OEM channel is working off excess inventory, dragging near-term sales. Management flags normalisation “by FY26” (see page 23 of 1H25 Investor Presentation). This suggests FY25 is still a transitional lag year, so investors should profile the cadence of OEM reorders and any shift in lead indicators.

4. Cash burn and cost discipline

Operating cash flow plummeted to just $1.2 million in 1H FY 2025 (vs $11.8 million in 1H FY 2024), and profit before tax swung from positive $5.6 million to negative $4.3 million. Free cashflow was negative $8.1 million for the half. 

As at 31 December 2024, Audinate still held $111.3 million in cash and term deposits with no debt. But with costs rising, hardware revenues weak, and leadership happy to keep making acquisitions, it’s worth keep an eye on cash burn and cash levels. I’d suggest subtracting 1H results from full year results to allow visibility on a half-by-half basis.

Remember, cash burn is still cash burn if it was spent on growth.

But what about the growth narrative?

You might notice that throughout this article I’ve spent very few words on the companies’ growth narratives. It’s not because I think growth isn’t important – it is. It’s because companies will undoubtedly shout that story loudly from the rooftops. But accepting their stories without looking through the reports for weeds is a good way to get caught up in hollow hype stocks. 

Access my free report 

This Aussie company is no longer strictly a small cap, but I believe the growth opportunity ahead of it remains large. I wrote this special report for A Rich Life Supporters, but today I'm making it available for free to Livewire readers. I still like the company as current prices – in fact, I bought more shares just over two days ago!

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Disclosure: Patrick Poke and Claude Walker both own shares in IPG, Claude also owns shares in PGC and AD8. Neither own shares in ATA. They will not trade shares in any of the companies mentioned for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).