Composite represents how much potential an item has for things like stats, spells and armor. Items with higher composite are allowed to have space for higher value attributes. Higher composite items are not necessarily better than lower ones and in some cases may even have the same stats they just have more potential. The formula for working out composite is complicated and depends on many different factors.
Some of the main things that might change an items composite are level or total level, wear location and item flags.
The amount of a particular stat that can be placed on an object is usually subject to a maximum limitation, although there are items the break these limitations they are rare:-