I believe it works on some sort of points system (possibly with some amount of fudge factor for bias, etc)
So for example (I'm about to pull some numbers out of my ass), lets say making top 16 earns you 1 point, top 8 earns you 2, 4th place: 3, 3rd place: 5, 2nd place: 7, and winning the tournament earns you 10. These "points" would only be awarded at majors or other tournaments large enough to draw in a good number of top players (so you can't just run up your count at locals.
So lets say you win a tournament, beating out all 5 gods, and you even managed to take sets from some of them. You now have 10 points, and second place has 7. Now you do it again at the next tournament, puting you at 20, and assuming the same player gets 2nd, they have 14. But then your hot streak comes to a screeching halt. Maybe you barely manage to crack top 16 at your next tournament, but if your old second place rival wins it, you're already tied in points at 21, and from there, the gap can easily get wider and wider.
If I wanted to take this waaaaay further, I'd say we could start creating an algorithm. Add some sort of decaying factor to tournament results so that older wins count for less than recent wins (which then start to count for less and less as time goes on). Then we could only take a player's 20 or so highest scores (with weighting/decay accounted for), that way you can't beat out other players simply by playing a lot and raking in small points here and there (also, old wins would eventually decay and fall out of the top 20 making your newer losses have a greater impact on your rank). I could go even further and analyze all of a player's placings to find their average points per tournament, then weight each points earning relative to the number of standard deviations away from that average (yeah, I went there). This way, if a player loses a lot, typically getting eliminated in the first few rounds, but pulls out a couple of fluke tournament wins, those wins will be assigned a lesser value to ensure they don't outrank a player who consistently places top 16, but rarely makes top 8 (2 wins and 8 total failures = 20 points, 7 top 16 and 3 top 8 = 13 points, but who should be ranked higher?)