Sharpe answers whether returns were earned smoothly or by taking wild swings. Two strategies returning 20% are not equal if one had 10% volatility and the other 40%.
Rough guides: below 1 is unremarkable, 1 to 2 is good, above 2 is excellent and should be checked for survivorship-bias or a short sample-size. Sharpe penalizes upside volatility too, which is why some prefer the Sortino ratio.
Example: a strategy returns 15% with 10% volatility while the risk-free rate is 5%. Sharpe = (15 - 5) / 10 = 1.0.
Related: volatility, max-drawdown, profit-factor, backtesting