Small-cap ASX shares can provide excellent returns, in my view, if they're able to grow their earnings.

It's easier, theoretically, for a small business to grow its profit from $10 million to $20 million because it shouldn't be facing size constraints in its market. I'd say it's a lot harder for a huge business to grow its profit from $10 billion to $20 billion due to its large size.

Plenty of promising ASX shares have soared this year, making them less appealing, but there are a handful of stocks that still look good value to me. I'm going to talk about two of them below.

Step One Clothing Ltd (ASX: STP)

Step One describes itself as a direct-to-consumer online retailer for innerwear. It offers a range of high-quality, organically grown and certified, sustainable, and ethically manufactured innerwear.

It looks much better value to me following a 21% decline of the Step One share price since 24 September 2024.

I think it's certainly possible the short term could be challenging if retail conditions worsen for Step One. Investors may have become wary following a partial sale of shares by the founder. However, that may not be a sign of any short-term issues.

The company's FY24 result was very promising – total revenue increased 29.7% to $84.5 million, the gross profit margin increased slightly to 80.8%, operating profit (EBITDA) jumped 50.8% to $18.1 million, and net profit jumped 43.9% to $12.4 million.

If we drill down, there were a number of positives. International growth was impressive, with US revenue growth of 261.5% to $5.5 million and UK revenue growth of 33.2% to $27.1 million. Women's revenue jumped 54% year over year to be 14% of total revenue (up from 11.5% in FY23).

With a growing international presence, the potential to expand to other countries (such as Canada) and rising profit margins, there's a lot to like about this small-cap ASX share's long-term prospects. I think the business can become much bigger in the coming years.

Rural Funds Group (ASX: RFF)

The Rural Funds share price has dropped more than 11% since 27 August 2024, and it has declined over 40% from January 2022.

This farmland real estate investment trust (REIT) owns various farm types, including cattle, almonds, macadamias, vineyards, and cropping.

Investors seem to be turned off agricultural assets at the moment, but I think this business can bounce back, particularly if/once the RBA starts reducing the Australian interest rate, perhaps next year.

Every result, Rural Funds tells investors what its underlying value is – the adjusted net asset value (NAV), which is the market value of the assets minus liabilities. At 30 June 2024, Rural Funds had a reported adjusted NAV of $3.14. This means the Rural Funds share price is trading at a huge 40% discount. I think that makes this small-cap ASX share very undervalued, combined with its solid rental profit generation.

Despite the high interest rate headwind, Rural Funds continues to generate solid rental profit. It's expecting to achieve 3.6% rental profit growth per unit in FY25, and it's trading at 16x FY25's estimated rental profit.