Convert to Snapshot will take your backup image and change it's settings in our system so it is stored as a snapshot image instead. This means it will no longer be deleted when new backups have been created and it can be used on any droplet on your account, not just to restore the one it was created from.
This will allow you to rebuild your droplet replacing it's disk image with your backup image. If you are looking to roll-back to your backup this is the option you would like.
It's also technically possible to both save your backup image as a snapshot (in case you want to use it again or have a copy of what you restored). First convert it to a snapshot using the option you are seeing. Then, click on your droplet, then on the Destroy option in the left side menu. In that subsection you will see a Delete and a Rebuild option. The Rebuild option works like the "Restore droplet" option but allows you to select any spanshot image on your account or one of our standard OS or one-click images.