War Capacity is a measure for how capable a nation is of continuing and possible winning a war. It is determined by the number of soldiers fielded by each side, available manpower, occupied territories, war exhaustion and other factors. The number ranges from 0 (nation has virtually collapsed or has no chance of winning) to 100 (well capable to go on).
War capacity is an important value for the AI to decide whether or not to continue a war. If the AI has a very low war capacity while the player maintains a high one, the AI will be inclined to admit its defeat and give concessions in peace negotiation.
Nations with a low War Capacity also become an attractive target for other AI rivals and neighbours.