Capacity Utilization Rate

DEFINITION of 'Capacity Utilization Rate'

A metric used to measure the rate at which potential output levels are being met or used. Displayed as a percentage, capacity utilization levels give insight into the overall slack that is in the economy or a firm at a given point in time. If a company is running at a 70% capacity utilization rate, it has room to increase production up to a 100% utilization rate without incurring the expensive costs of building a new plant or facility.

Also known as "operating rate".

[ (Actual Output)/(Potential Output) ] x 100

 

BREAKING DOWN 'Capacity Utilization Rate'

Capacity utilization rates can also be used to determine the level at which unit costs will rise. For instance, let's say that Company XYZ currently produces 10,000 widgets at a cost of $0.50 per unit. If it is determined that it can produce up to 15,000 widgets without costs rising above $0.50 per unit, the company is said to be running at a capacity utilization rate of 66% (10,000/15,000).

This is best applied to companies that produce physical goods rather than services, as the capacity measurements are much easier to quantify.

RELATED TERMS
  1. Contribution Margin

    A cost accounting concept that allows a company to determine ...
  2. Capacity Management

    The management of the limits of an organization's resources, ...
  3. Aggregate Capacity Management

    The process of planning and managing the overall capacity of ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  5. Operating Expense

    A category of expenditure that a business incurs as a result ...
  6. Labor Intensive

    A process or industry that requires a large amount of labor to ...
Related Articles
  1. Fundamental Analysis

    Calculating the Capacity Utilization Rate

    Capacity utilization rate is a ratio used to compare a current usage level against a maximum potential level.
  2. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  3. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  4. Investing

    Doing More With Less: The Sales-Per-Employee Ratio

    If used properly, this ratio can give you insight into a company's productivity and financial health.
  5. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  6. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  9. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  10. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
RELATED FAQS
  1. What does a climbing interest rate risk signify about the economy?

    Climbing interest rate risk typically signifies the economy is strong with considerable financial activity. When an economy ... Read Full Answer >>
  2. What economic indicators should be monitored when investing in the industrial sector?

    The major economic indicators to monitor when investing in the industrial sector are economic growth, interest rates and ... Read Full Answer >>
  3. What economic indicators are important to consider when investing in the chemicals ...

    The most important economic indicators to consider when investing in the chemicals sector are economic growth, interest rates, ... Read Full Answer >>
  4. What economic indicators are important to monitor when investing in the electronics ...

    The most important economic indicators to monitor when investing in the electronics sector are global gross domestic product ... Read Full Answer >>
  5. Why should investors pay attention to a corporation's selling, general and administrative ...

    Selling, general and administrative expenses (SG&A) are significant elements of many companies' income statements. These ... Read Full Answer >>
  6. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center