This number means how many successfully created backups to keep when a scheduled job is executed. When a scheduled backup is successfully created, a file named .backupcomplete is created to indicate a successful completion of the process.
A scheduled backup first creates an image and only then looks for old images to delete. Only successfully created backups (those having .backupcomplete file in their folder) are considered as candidates for removal. Normally if the creation of the backup failed, the co-responding .ADI file is removed at once, so only log files will be left in the backup folder for subsequent analysis.
Disk image enumerates all existing backups excluding the one just created and deletes the oldest, keeping only specified number of them.
For example, if "Number of previous backups to keep" is set to value of 2 and there are two existing backups, a third backup will be created, then Disk Image will encounter old two backups (the last one will not be counted) and since this number is equal to requested one, no actions will be performed, effectively leaving 3 backups. The subsequent backup will find 3 old existing backups, so the oldest of them will be deleted, leaving again 3 backups — 2 old ("previous") and one just created.
When "Number of previous backups to keep" is set to 0, it will lead to removal of all old backups, leaving only the recently created one.