Yes, it works on the LastModified attribute of the Dest file. Given that if a file is deleted from Source between profile runs, we don't know when that was (and there are no little tombstones left behind to say). And whatever deleted it on Source didn't helpfully change some attribute (which one?) of the Destination copy to reflect that date/time. Hence, we have nothing else to refer to but LastModified on the Dest copy as a possible indicator of recent activity re content.
If you use Versioning, it will capture deletions too (we just treat deletion as a fairly drastic change...). But Versioning will capture edits, too. You can set it to keep only [1] Version for [however long you like], which will limit the space required, but there's no way to specify 'only deletions'. You may feel keeping one previous-copy of anything that changes is a boon or a curse, but it's not optional. You can opt for both or neither.
If you use Versioning, it will capture deletions too (we just treat deletion as a fairly drastic change...). But Versioning will capture edits, too. You can set it to keep only [1] Version for [however long you like], which will limit the space required, but there's no way to specify 'only deletions'. You may feel keeping one previous-copy of anything that changes is a boon or a curse, but it's not optional. You can opt for both or neither.