Desai, How Finance Works

If you are a burgeoning equity analyst or a self-directed fundamental investor, you will be confronted with reams of corporate financial data, from EBITDA to net present value. Even if you know how to calculate financial formulas, do you know what they are telling you? Can you put them into an appropriate context? Can you use them to make informed decisions?

How Finance Works: The HBR Guide to Thinking Smart about the Numbers (Harvard Business Review Press, 2019) emerged from Mihir A. Desai’s efforts to teach finance to MBA students, law students, executives, and undergraduates at Harvard. It is itself a wonderfully smart introduction to finance, with the only two prerequisites to the book being curiosity and perseverance. It comes complete with tables, figures, and graphs. It also features boxed reflections and analyses from the author and real-world perspectives from two CFOs, two investors, and an equity research analyst. And, of course, there are lots of relevant case studies.

In six chapters Desai covers financial analysis, the finance perspective, the financial ecosystem, creating and measuring value, the art and science of valuation, and capital allocation. At the end of each chapter is a 10-question quiz, with answers at the back of the book.

Any active investor who wants to do more than throw darts at a list of stocks or look at squiggles on stock price charts should read Desai’s book. It’s a gem.