Time Capsule and NAS

Format it as Mac OS Extended (Journaled) just as you did in the past. TC won't recognize APFS.

Time Machine will continue to back up to that Mac OS Extended formatted disk if you wish to continue using it for TM backups.

When I searched on 'MacOS Format for Time Machine' there was an Apple Support article (Types of disks you can use with Time Machine on Mac - Apple Support) that said "APFS or APFS Encrypted disks are the preferred format for a Time Machine backup disk."

They are, but Apple is assuming here that the hard drive is connected directly to a Mac.....a "local" drive. Apple doesn't say much about the Time Capsule anymore since it was discontinued 4+ years ago.

But, the Time Capsule is a "network" drive (and any hard drive connected to the Time Capsule is also a network drive). Time Machine can only back up to a network drive that is formatted Mac OS Extended (Journaled).

Ironically, if you format a hard drive as Mac OS Extended (Journaled) and connect it directly to a Mac and then set up Time Machine to back up to the drive, Time Machine will automatically reformat the drive as APFS (Case Sensitive). You won't even know this has occurred unless you happen to check the drive.

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Time Capsule predated APFS's implementation. That's why it can't recognize it — not without a software update anyway — which will never happen.

(Neither can older Macs, when a user erases an APFS startup disk and boots its built-in Recovery mode. It's a similar situation.)