It inspects the file system’s modification date meta information.
See, for instance, the stat() man page and the st_mtime member of the struct stat.
It has built-in rules that tells it that (for instance) a .o file needs to be re-generated if the corresponding .c file has changed; the manual section on rule syntax says:
The criterion for being out of date is
specified in terms of the
prerequisites, which consist of file
names separated by spaces. (Wildcards
and archive members (see Archives) are
allowed here too.) A target is out of
date if it does not exist or if it is
older than any of the prerequisites
(by comparison of last-modification
times).