I've noticed nobody has mentioned that it's VERY important to get the correct compression gauge for small engines. There are two types- those with a schafer valve (like a tire valve) in the end that screws into the plug socket, and those without. If you use the type without the valve at the hose tip, you'll always get an abnormally low reading as the volume of the tube feeding the gauge is significant with respect to the volume of the cylinder. I got caught by a gauge that showed me 130lbs compression. After tearing down the motor and finding it in great shape, I borrowed another guage and it read 170lb. Took me a while, but I figured out that there was nothing wrong with either guage - just the wrong type. My local NAPA store sells the WRONG type for small engines.
I read compression on all Stihl engines before repair just to get a ballpark indicator of condition, but you can get mislead. New from stihl (036, MS200 and others) I see 170-180. A very good used engine will show 160-190lb, sometimes more (I have an 034 in right now with 192lb!). Below 120, they get harder to start and really don' t run well.
If there is excessive carbon buildup on the cylinder or piston, the compression can be 10lb higher, and this isn't necessarily good! I see this all the time where a bad carb has been rebuilt, but the piston/cylinder hasn't been decoked.
I had an 036 with 175lb that ran pretty good, but sounded a little bad (knocking) while idling (another Ebay "special"). Inspection of the bore though the exhaust port showed it to be excellent. The piston looked a little scratched on the intake side, but nothing unusual. I stripped it down. The cylinder bore BELOW the intake side was worn completely though the nikasil coating and about 1/2 mm into the aluminum casting. The "knocking" was from piston slap. I figure this was caused by running with a bad air cleaner (or none at all).
Some non-scientific observations: Compression has a lot to do with max horsepower. It's harder to see on saws as there are so many variables, but easy on blowers like BR400/420 as the conditions are constant. With tubes installed, good gaskets/seals, stock muffler, and rebuilt carb adjusted to max rpm on the rich side, then backed off 100rpm, those with compression of 145-175lb will typically pull 7200-7500 rpm (the fan wheel absorbs all the power so there isn't a high "no-load" rpm like a saw); compression of 135 or less will not pull more than 6200 rpm, and at 120 they really have problems running at all. It may not sound like a lot, but 1000prm at full power is significant.