After building a blacksmith's workshop (Smithy) in the city, the hero gains access not only to repair and trade of equipment, but also an ability to craft new items of equipment and upgrade them. The smithy's workshop can be improved (which affects random items found in looted chests!), so that we can create things from better material and improve those we have even further.
Both of these activities require a lot of money and raw materials, as well as time, which ranges from several dozen seconds to even several hours. During this time we cannot use the services of the blacksmith, so it is worth to build a second workshop in the city, so as not to dissociate yourself from the possibility of repairing or selling the brought loot.
It should be noted here that upgrading an item increases its base stats (damage, block or defense points and durability), but not the value of the bonus it has (e.g. the bonus to points of resistance to the selected damage type or restoration of health points after receiving damage).
Don't be afraid to upgrade an item by just a few levels, because the required resources for further upgrades will be reduced by those already used. In addition, it is worth buying the Advanced Tempering perk, as it allows you to further increase your capabilities in this area.
But don't forget that found chests may contain much better equipment and then all the resources and time spent on creating and upgrading items will be wasted. It is therefore necessary to approach these opportunities soberly and not to invest in any item just for fun.