As I suspected, the TOSLINK output is perfect; any audible limitation here is the AirPort's DAC and your source material. As far as I can tell short of comparing bit-for-bit, the optical digital output is a perfect copy of the original, the whole point of digital audio.
The AirPort Express DAC is also very, very good. In some ways it's not quite as good as a $3,000 CD player, and in others it's even better. I'm very happy, this new AirPort Express has much better analog audio quality than the old AirPort Express.
What's superb about this AirPort is that it has a full 2 Volt RMS output, not a whimpy 1 V or less output as we get from the jacks of iOS devices or many other and more expensive outboard DACs.
It's more difficult to set up than Bluetooth, but has no coding loss to affect the audio that Bluetooth does.
At any price, the Apple AirPort Express is a great DAC. It sounds great, with a completely silent background, full 2 V output, smooth detailed sound and full infrasonic bass response.