It can store and play various 'lossy' formats with sample rates from 8 to 320 Kbps, some with VBR, but at the top of the quality 'heap' are AIFF files, which are the highest quality supported.
These are uncompressed, bit-accurate copies of the original file, but Apple lossless, ALAC for short, creates as the name implies, lossless, but compressed, files which are naturally smaller in size, but for all intents and purposes the sound they produce upon playback on good equipment is just as good for any, but the most discriminating listeners; you know, those with 'golden' ears and the most esoteric equipment, some of whom who claim to be able to hear the difference.