This proverb tells us people of the same tastes and habits like to be together and influence each other. If one behaves well, his friends are also noble-minded. If a person behaves badly, his friends are not supposed to be honorable. Therefore, a man can be known by the company he keeps.
The proverb advises us to make good friends and right decision. A well-behaved friend can benefit you and an immoral friend will lead you to enjoyment and laziness.

察：观察。
      To observe.

造句 ( example )
表弟好像不爱学习了，古人说“察其友，观其人”，看他的朋友们都喜欢通宵打游戏，估计他也好不到哪儿去。