ASX small-cap stock Step One Clothing Ltd (ASX: STP) looks to be an excellent investment opportunity at a share price of around $1.70, in my opinion.

While the ASX is known for industries like ASX bank shares and ASX mining shares, big names like Westpac Banking Corp (ASX: WBC) and Rio Tinto Ltd (ASX: RIO) won't necessarily deliver the strongest returns. There are plenty of good opportunities that are smaller.

Step One is an interesting, small business. It's a direct-to-consumer online retailer of innerwear. The company describes its products as "high-quality, organically grown and certified, sustainable, and ethically manufactured".

The Step One share price has dropped 10% since 24 September despite the company reporting good progress in recent results. I believe this is a good time to invest in the ASX small-cap stock at this better valuation for the long term.

There are a few reasons why I like it, which I'll outline below.

Strong revenue growth potential

When I consider a company's potential growth, I look for a compelling total addressable market (TAM). This means the company has a lot of room to grow from its current position.

The company isn't just an Australian business; it also has operations in the United Kingdom and the United States, both of which have much larger populations than Australia.

We saw that growth potential in FY24, with total revenue growth of 29.7% to $84.5 million, including UK revenue growth of 33.2% to $27.1 million and US revenue growth of 261.5% to $5.5 million.

The company is testing new countries such as Canada and Germany, which also have significantly more people than Australia and offer long-term growth potential.

The ASX small-cap stock is looking to expand its underwear range and grow with adjacent products, win new customers, and increase sales on established platforms and marketplaces and through retailers like John Lewis.

Operating leverage

Another important thing I want to see from a growing business is a rising profit margin. Operating leverage means the company benefits from becoming larger — beyond just higher revenue.

Investors typically focus on a business's profit, so it is appealing to be able to grow profit at a rapid pace. Profit generation also funds potential dividend payments.

Step One's overall revenue increased 29.7% to $84.5 million, and net profit increased 43.9% to $12.4 million. I don't expect profit to grow every year at that rate. However, I do believe earnings can keep growing if the company keeps expanding geographically.

Management alignment

Step One founder and CEO Greg Taylor recently sold around 9% of the company's issue capital. Although it's normally not a great sign to see management sell shares, Taylor still owns a significant amount of the business.

After the sale of the shares, it was disclosed that Taylor would retain approximately 57.9% of the business, remaining Step One's largest shareholder. The sale was driven by "strong investor demand and enhances liquidity and free float broadening the share register".

Success for regular investors is also good for the boss, so he's highly motivated to deliver for all Step One shareholders.

I think this ASX small-cap stock is being led by the right team to deliver success, and it's a bargain right now.