Investors often use return on equity as a quick way to judge the overall quality of a company. After all, the more profit a company churn out on a given amount of equity, the more of the green stuff it can pile up for its investors.

In 2006, natural gas specialist El Paso Corp (NYSE: EP) delivered an 11.3% return on equity for its investors before watching its fortunes taking a turn for the worse and chalking up losses in 2008 and 2009. Recent times have been much better for El Paso investors though, as the company has rustled up a near 24% return on equity over the past 12 months.

But before you get too excited, it's important to remember that not all ROE gains are made equal, so it pays to figure out exactly where those gains are coming from.

DuPont analysis breaks down ROE into three parts: profit margin, asset turnover, and leverage. This allows investors to pinpoint exactly how a given company is generating its returns.

Let's take a look at how El Paso has been drumming up its returns.

Metric

2007

2008

2009

Last 12 Months

Net Income Margin

23.9%

(15.3%)

(11.6%)

19.3%

Asset Turnover

0.2x

0.2x

0.2x

0.2x

Leverage

4.7x

5.9x

7x

6.3x

Source: CapitalIQ, a Standard & Poor's company, and author's calculations.

This is a mixed showing for El Paso. The return of significant profitability for the company is certainly a good thing, but the increased leverage that helped boost recent returns on equity is a bit more worrisome.

While some companies clearly have room in their capital structure to increase leverage to the benefit of equity-holders, it'd be tough to put El Paso in that camp. Since 2007, the company's already hefty $12.8 billion debt load has increased by nearly $1 billion, and the company's cash flow versus interest payments would make it very hard for some investors to sleep well at night.

Of course we don't want to just look at El Paso in a vacuum. Here's a look at how the company stacks up against some comparable companies.

Company

Net Income Margin

Asset Turnover

Leverage

ROE

El Paso

19.3%

0.2x

6.3x

24.2%

Kinder Morgan Energy Partners (NYSE: KMP)

16.5%

0.4x

3.1x

20.5%

Atmos Energy (NYSE: ATO)

4%

0.7x

2.8x

7.8%

Williams Companies (NYSE: WMB)

3.3%

0.4x

3.3x

4.4%

Chesapeake Energy (NYSE: CHK)

7.5%

0.3x

2.2x

5%

Source: Capital IQ, a Standard & Poor's company, and author's calculations.
Data is for last 12 month period. ROE is return on ending equity.

The first thing that should be noted is that it's a little tough to line up companies that are truly like El Paso. The company owns natural gas assets such as pipelines, but it is also out in the field finding and producing nat gas. Williams Companies is probably the most directly comparable company while the others stack up to one or the other of El Paso's main business lines.

But regardless of business line, two things are readily apparent about El Paso versus the rest of the group. First, the company has been much more profitable than most of the other players recently. However, for investors, this profitability has come along with a much riskier balance sheet than any of the other companies above.

For fans of the natural gas industry, El Paso looks like it could be an interesting play. Losses in recent years were primarily driven by non-cash writedowns and recent profit margins have been impressive. However, conservative investors may prefer a more prudent balance sheet than El Paso's.

Could now be a good time to find some stock shorts? I'm beginning to think so.

Chesapeake Energy is a Motley Fool Inside Value recommendation. The Fool owns shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.