It has both LITERAL and SYMBOLIC meaning.
The literal meaning are mentioned above by some people. Your container can't hold water because it has a hole, so the water is leaking.
The symbolic meaning (in figure of speech), it means that statement you made does not have a sufficient proof to support an argument.
Example: If you accuse your neighbor of throwing trash on your yard, you need to find some evidence so that your accusations "will hold water" on court, or your accusation is true or factual.