[Schneed10]

This link tells you all about the mathematical equation they use to determine team ratings, but in plain English:

The Colts’ rating should equal their average point margin (which was +12), plus the average of their opponents’ ratings.

Taken further:

So every team’s rating is their average point margin, adjusted up or down depending on the strength of their opponents. Thus an average team would have a rating of zero. Suppose a team plays a schedule that is, overall, exactly average. Then the sum of the terms in parentheses would be zero and the team’s rating would be its average point margin. If a team played a tougher-than-average schedule, the sum of the terms in parentheses would be positive and so a team’s rating would be bigger than its average point margin.