The main benefit I've found of using a Toslink cable is the lack of noise compared to the analog RCA connectors. You should try and keep cables as short as possible. Any cable (a channel) will technically affect the signal, but one of the advantages of a well designed digital audio system is that the reproduced sound will be unaffected by the channel. In my experience, I feel that compact disc digital audio is very robust and can be entirely transparent.
In a well designed system (with a good DAC), it is the quality of the analog-to-digital converter (ADC) the determines how good the sound quality is. The is out of your hands, since the ADC is done at the recording studio. You shouldn't forget that the quality of the recording and mixing will have a considerable affect on the sound quality. My own view is that nowadays less money is spent on making good recordings of music (and also of getting good performances) than was done so in the past. This is also apparently becoming a weakness in the DVD industry, where quality is falling despite improvements in technology.
