It levels the ground to the elevation where you are currently standing, if it can. It is limited in how much it can change. To go deeper, you need a pick axe (kill first boss first). To go taller you need rocks and a workbench to raise terrain. And even with that, it's hard to get it looking perfect.

Pathen only removes grass and doesn't level. It's mostly to mark trails, which can help if you're planning a build over a large area, or marking up the ground to make navigation easier.