Physical is the most commonly used Offense stat. It affects how much damage that Attacks with the Physical type will do; the higher, the better. Also, a higher Physical score tends to make Parrying attempts (assuming you have the Parry ability) against attacks with the Physical type more likely to succeed.
Physical represents, broadly, your proficency with punches and kicks, as well as with most handheld weapons such as knives, swords, basketballs, ladders, and so forth. It represents the raw force you can use in wielding them, as well as, to a degree, skill and talent with these various attacks, or at least the parts relevant to your fighting style.
People who have higher than average Physical scores tend to also have good Soak scores. However, they tend to be less skilled at the offensive and defensive aspects of Throws, and/or Chi and Psi.
Note that Physical is also a rough measure of your character's physical musclepower, though it is not an absolute guideline. Ryu's Physical score is higher than Zangief's, but this represents his superior experience as a fighter (which is also shown in the fact Ryu is a higher Ratio character than Zangief). However, Zangief is superior to Ryu when it comes to lifting heavy objects. As a result, some common sense must apply, and your Physical stat/score is usually just a suggestion, not an absolute, in regards to things like lifting, pushing, etc.