Think of digital signal as in the signal is still in computer format. All of the frequency information has been converted to binary data, ones and zeros. This is the way music is now stored on modern media like CDs and in media files like MP3s.
Digital is a very accurate way to get musical data from point A to point B. Essentially, the musical information should never never change from the player to the receiver as long as it stays digital.
At some point, the information has to be converted to analog. Speakers are simple electronic devices and required an analog signal. An oversimplified way to explain analog signal is that the sound frequencies (waves) are represented by the equivalent waves/frequencies in an electrical signal. Think of a wave pattern and the top of the pulse will drive the speaker driver out a corresponding amount and and the bottom of the pulse will suck it back in the corresponding amount.
The DAC, Digital to Analog Converter does just that. It does the math one the binary information and sends out the corresponding electrical frequency waves.
There are two schools of thought as to where you want that to happen.
1. Keep it digital until as close to the end as possible. Saves on the number of cables used and the binary data stays the same longer.
2. Some DACs do a better job of converting the binary data into frequencies than other. Use the device in the line that has the best DAC or even add a third party DAC into the mix.
Proponents of number 1 will say that the differences in modern DACs is negligible and not audible. They will say that if it's not doing the math the same, it's broken not better or worse. I'm not going to argue one way or the other here. I'm trying only to explain who it works.
As above, to send a digital signal you require a HDMI, co-ax, or optical cable. All of the channels for surround sound can be sent in the same single cable. Also with HDMI, it can send the video data as well. Some copy-write schemes are requiring certain levels of HDMI in their protections schemes.
Analog cables can only carry a single channel of data. So wherever you use the DAC to convert from digital to analog, from that piece of equipment on, you will be required to use a set of analog cables per channel. It's typically run on speaker wires or co-ax/RCA wires if you are going in between components.
You expect to do this at the end where you need to run a pair of speaker wires from the receiver to every speaker but lets say you decided to use the DAC in your CD player for whatever reason. You will need to run a set of RCA cables from the player to your receiver for every channel. Stereo would just need two pairs. 5.1 would require 5 sets plus another for the subwoofer channel.
If you choose to stay digital between your player and receiver, you can make do with just one HDMI.
What devices support what sound formats is another factor, but I've already typed to much. I hope this helps though.
With great power comes Awesome irresponsibility.