Loss of compression has three usual ways of happening. A burnt valve, bad piston rings, or a bad head gasket. All three of these things can be cause by other problems with the engine, like a burnt valve by not checking and adjusting the valve clearance, bad pistons rings from over heating the engine and this can also cause a blown head gasket by warping the cylinder head surface. If a cylinder has been run lean for a while, you could burn a piston. If a cylinder has been run rich on fuel, you could damage the ring lands in the piston and have bad rings and pistons.
So one way to figure out what it might be is to know more of the past history of the engine and what kind of maintenance has been done to it. Has the car been over heated, has it been ran low on engine coolant, what color is the coolant, has the coolant been changed, has the valve clearance been checked and adjusted, does the engine use oil, what other repairs have been done?
Checking the compression can be done with two types of compression gauges. One is a pressure gauge that is done as this link shows:http://www.popularmechanics.com/cars/ho ... -14912158/
As the article shows, adding oil to the test may give you a clue if it is a valve leak or a ring problem. This is the older way of checking compression and is referred to as a dry and wet compression test, wet is when the oil is added. The other compression test is called a leak down test and is done with a different type of gauge setup that feeds air into the cylinder. Here is a little better article on both testing methods:http://www.dsmtuners.com/threads/compre ... ng.338152/
You could also get an idea if it is a burnt valve by checking the valve clearance. If the clearance is tight or none, you have very good odds that it is a burnt valve. Any testing you do will go back to a compression test or pulling the head off and tearing things down to find where the major compression loss is at. Everything has wear on it at this point so fixing the major cause should get the compression back but do not expect it to run like a new motor because the rest of the engine is still has wear on it too. O' and there are other ways to loose compression too like I mentioned above about a burnt piston, or cracked cylinder wall, a bad camshaft lobe on the intake valve if doing a regular compression test (if air can not get into the cylinder, it can not be compressed), etc... If it has low compression there is no good way to know for sure what the cause is until you have to take it apart and you may as well because it is no good the way it is now.