Yes. The graph is a convenient, if usually inaccurate, indicator of military strength. I believe it is calculated as (total attack + total defense + (total HP / 10)). The AI uses this value to tell if it's stronger than an opponent.
Obviously, this evaluation is pretty simplistic, and can make the AI think its tougher than it is. Ships in orbit are 1.5 times as powerful, meaning that they are not as effective on offense. Military starbases have a similar defense-only effect unless they are positioned offensively in another race's territory.
More importantly, weapon and defense types are not considered, and the design of opponents ships is not taken into consideration. For instance, you could have a thousand fighters with 1 beam attack, and I might only have a single dreadnaught with 30 missile attack and 50 beam defense. Your military rating would be something like 1000, while mine would be more like 90. However, in a war, I would win. Your fighters wouldn't even dent my dreadnaught, and may only make it stronger by leveling it up.