Both are different format.
PCM - Audio format first decoded in your player and then sent to receiver or preamp. Receiver/preamp does no further processing, just amplifies the sound and sends it to speakers for listening. Use this option if your player is of good/pricey brand.
Digital - Weather Dolby/DTS/etc, is sent by your player in bitstream untouched format to receiver/preamp for further processing/decoding and your receiver/preamp will check/sense type of input signal and decodes in appropriate format, amplifies it and later sends to speaker for listening. Use this option if your receiver/preamp is of good/pricey brand.
The best way is to listen both, hope it helps.