1. It uses information about mod dependencies that mod authors specified on steam mod pages in "Required items" section of page.
2. It looks for dependencies and load order rules in About.xml and Manifest.xml files for each mod
3. It loads your rules that you have created by yourself (Custom DB)
4. It loads community database (you may send your Custom DB to be included in it)

If there are no special rules, mod will be sorted alphabeticaly. There are a lot of rumors about mod sorting. You should know that dependant mods should be lower than dependencies. If two mods generates issues when loaded, you should try to move the last of it to be higher than first one in mod list. It may look weird sorting them alphabetically but that makes sorting unified for all users. The same mod list but with different mods positions in most cases will be the same for any RimPy user after sorting. That helps to identify mod conflicts and create specific rules faster.

After sorting you may see a report about issues - missing dependencies, dependency cycles or UNKNOWN mods. Unknown mods are mods that are not found in (1) database because database may be outdated. Then step (1) for them will not apply, nevertheless RimPy will use other information - About.xml, Manifest.xml, Custom and community databases to sort them.