diff --git a/doc/source/whatsnew/v0.25.0.rst b/doc/source/whatsnew/v0.25.0.rst
index 561562f367db2..8d246b16ea4c4 100644
--- a/doc/source/whatsnew/v0.25.0.rst
+++ b/doc/source/whatsnew/v0.25.0.rst
@@ -347,7 +347,7 @@ Groupby/Resample/Rolling
 - Bug in :func:`pandas.core.groupby.GroupBy.agg` when applying a aggregation function to timezone aware data (:issue:`23683`)
 - Bug in :func:`pandas.core.groupby.GroupBy.first` and :func:`pandas.core.groupby.GroupBy.last` where timezone information would be dropped (:issue:`21603`)
 - Ensured that ordering of outputs in ``groupby`` aggregation functions is consistent across all versions of Python (:issue:`25692`)
-
+- Ensured that result group order is correct when grouping on an ordered Categorical and specifying ``observed=True`` (:issue:`25871`)
 
 Reshaping
 ^^^^^^^^^
diff --git a/pandas/core/groupby/grouper.py b/pandas/core/groupby/grouper.py
index e470a32b85cd6..335d40dd16949 100644
--- a/pandas/core/groupby/grouper.py
+++ b/pandas/core/groupby/grouper.py
@@ -302,6 +302,8 @@ def __init__(self, index, grouper=None, obj=None, name=None, level=None,
                 if observed:
                     codes = algorithms.unique1d(self.grouper.codes)
                     codes = codes[codes != -1]
+                    if sort or self.grouper.ordered:
+                        codes = np.sort(codes)
                 else:
                     codes = np.arange(len(categories))
 
diff --git a/pandas/tests/groupby/test_categorical.py b/pandas/tests/groupby/test_categorical.py
index e118135ccc75d..8dfb27ee34232 100644
--- a/pandas/tests/groupby/test_categorical.py
+++ b/pandas/tests/groupby/test_categorical.py
@@ -453,6 +453,28 @@ def test_dataframe_categorical_with_nan(observed):
     tm.assert_frame_equal(result, expected)
 
 
+@pytest.mark.parametrize("ordered",  [True, False])
+@pytest.mark.parametrize("observed", [True, False])
+@pytest.mark.parametrize("sort",     [True, False])
+def test_dataframe_categorical_ordered_observed_sort(ordered, observed, sort):
+    # GH 25871: Fix groupby sorting on ordered Categoricals 
+    # Build a dataframe with a Categorical having one unobserved category ('AWOL'), and a Series with identical values
+    cat = pd.Categorical(['d', 'a', 'b', 'a', 'd', 'b'], categories=['a', 'b', 'AWOL', 'd'], ordered=ordered)
+    val = pd.Series     (['d', 'a', 'b', 'a', 'd', 'b'])
+    df  = pd.DataFrame({'cat': cat, 'val': val})
+
+    # aggregate on the Categorical
+    result = df.groupby('cat', observed=observed, sort=sort)['val'].agg('first')
+    
+    # If ordering is correct, we expect index labels equal to aggregation results,
+    # except for 'observed=False', when index contains 'AWOL' and aggregation None
+    label = pd.Series(result.index.array, dtype='object')
+    aggr  = pd.Series(result.array)
+    if not observed:
+        aggr[aggr.isna()] = 'AWOL'
+    tm.assert_equal(label, aggr)    
+
+    
 def test_datetime():
     # GH9049: ensure backward compatibility
     levels = pd.date_range('2014-01-01', periods=4)