Compression tests basically give you and insight of the plight of the engine without dismantling the whole thing.Compression testing usually helps determining problems arising due to bad plug wires, worn distributor, leaking valves, or worn or broken piston rings etc.
Performing the compression test is fairly simple. It is usually performed on a hot engine because that is the state that the engine operates in most of the time. Both the engine block and the pistons and rings will expand when heated and the most accurate indications of engine condition are obtained with the engine at operating temperature. This does not mean, however, that you cannot perform a test on a cold engine and get useful data, it simply means that the data collected may be slightly less accurate than when the engine is at operating temperature.YOu remove the spark plug of the cylinder in question and insert a Compression test guage. Crank the engine over for five or six revolutions while holding the throttle open.This is known as a dry test.
To further isolate the problem, run a "wet compression check". This is done by squirting a some oil in each cylinder (about a teaspoon per cylinder). If the compression comes up to specs with the wet check, you have worn or damaged rings and are looking at engine rebuild. If the compression doesn't change, you have valve problems and usually can solve your issues with a valve job.