Watershed characterization is essential for sustainable watershed management and effective resource utilization, particularly in assessing changes resulting from interventions. This study investigates the biophysical and socio-economic conditions of the Agewmariam watershed, aiming to develop land capability and suitability maps while identifying viable management options. Biophysical data, including land slope, soil properties, erosion severity, stoniness/rockiness cover, and vegetation cover, were collected through field surveys and analyzed using overlay analysis in ArcGIS. Socio-economic data, encompassing population demographics, income, and expenditure, were gathered via individual interviews, complete census, and focus group discussions and summarized using descriptive statistics. The study identified 259 households with an average family size of 4 and a demographic dependency ratio of 96.6%. The major sources of income are crop production and livestock rearing supplemented by casual labor and food aid. The average farmland holding size is 0.5 ha, with sorghum, barley, teff, and wheat as the dominant crops. The watershed is characterized by six land capability classes (classes II, III, IV, VI, VII, and VIII). The suitability analysis indicated that the watershed is not currently suitable for wheat and teff crops unless physical, chemical, and biological management improvements are implemented. The study revealed that the major limiting factors for land capability and suitability were slope, erosion severity, stoniness, soil organic matter, and soil texture. The socio-economic characterization enhanced awareness about the local socio-economic condition, informing appropriate planning and management strategies. The study recommends intensive soil and water conservation intervention, afforestation on hillsides, changing the land use system, and the addition of organic matter and fertilizers to enhance land capability and suitability for sustainable agricultural practices.