Engine should be warm, all plugs removed, throttle wide open. That said, a compression test is a preliminary test. To determine actual performance, a leakdown test should be performed.
On a 4 stroke the leakdown is the most important.
100 psi is applied to a combustion chamber (via the spark plug hole) with both intake and exhaust valves closed. If the cylinder holds 95psi, it will show 5% leakdown on the gauge.
It can tell you if:
Exhaust valve is leaking (most common on these engines, if there is excessive leakage)
Intake Valve is leaking
Piston Rings are leaking
Leakage via a valve can also be caused by carbon buildup on the valve seat, most often on the exhaust valve. This could mean valve guides and seals are excessively worn... but not always.
In general, it can give you a good picture of overall engine health.
It cannot tell you if valve guides are shot, however, if guides are badly worn then the valve will "wobble" resulting in wear to the valve and/or valve seat over time.
A leakdown test on a 2 stroke is much more complicated and will require some special tools and methods but is just as important in determining the engines' health. https://www.duncanracing.com/TechCenter/2stk_presstest.pdf