Capello, who managed the Rossoneri from 1991 to 1996 and again in 1997-98, gave an interview to the Gazzetta dello Sport ahead of Milan's game against Juventus on Sunday night.
Asked about the gulf in financial strength between his two former sides, Capello apportioned blame to the short-lived Li Yonghong era.
"Milan had the misfortune to be sold to someone who did not have the resources to manage a world-class club. Now there is Elliott, which gives priority to the accounts and resolving the previous debts, but also, the choices of some players turned out to be wrong."
Pressed on what the possible objectives remain for the rest of the campaign, Capello said the club have to be realistic.
"Take it one game at a time and be realistic. This Milan cannot afford to dream."
Capello does believe however that the potential signing of Zlatan Ibrahimovic would be a coup for his old team.
"It would be a great move, Ibra wouldn't come just to spend the winter [in Milan]. He can still make the difference in Italy. I know him well and I'm sure that if he returned to Italy, he would be a protagonist."