Capacity Utilisation

Imagine a restaurant with seating for a hundred people that is currently serving only forty guests a day. It clearly has plenty of room to serve more customers without needing to expand its dining room at all, at least until it gets much closer to that hundred person ceiling. Capacity utilisation is exactly that same measure applied to a factory.

Capacity utilisation is the percentage of a factory's maximum possible output that is actually being produced, calculated against the plant's installed or rated capacity. A factory running at a low utilisation rate has meaningful room to grow sales simply by producing more from existing equipment, with no fresh capital expenditure required, while a factory already running near full utilisation will typically need new capex to grow revenue much further.

Capacity utilisation is one of the first numbers analysts check when evaluating a manufacturing company's near term growth potential, since a company with low utilisation and rising demand can often expand profit margins sharply as fixed costs get spread across more units of output, a dynamic commonly referred to as operating leverage.