Interesting question. Italy lacked the industrial capacity to fight a modern global war but it was still a decent power. Had it used its (limited) resources better, it could have done much, much better. People look at the myth of silly Eye-ties surrendering in droves but forget the problems facing the Italians and they still put up some of the hardest fighting in the desert.
The Italian army was largely geared to fighting against the French or the Balkan nations. So its equipment was rather light (light, portable guns, light tanks etc.). It was also largely non-motorized.
But their main problem was Mussolini. Probably the stupidest war leader in history (he made Hitler seem the epitome of rationality), Mussolini started out by invading France on the spur of the moment (afraid Hitler would finish off the French before he got in on the peace deal) so the Italian army which did so badly against the French alpine forts were hurled forwards without proper planning (on the other hand, it was a criminal neglect of the Italian officers not to have prepared contingency planning for just such a situation).
He then ordered his forces to attack Egypt but starved them of trucks and medium tanks. These were available but were earmarked for other adventures (mostly in the Balkans).
As the army in Egypt was floundering, Mussolini ordered yet another hasty invasion of Greece but not before making sure the Greeks would now about it. Which led to yet another predictable defeat.
And as the war in the desert became more protacted in '41-'42, Mussolini insisted on sending (most of his best) troops to Russia to support Hitler.
By spreading his meagre resources on too many fronts, defeat was preordained.
So how far could they have gone with better strategy?
The Italians should have sent a decent force to Libya instead of large masses of infantry. With proper logistics and better tanks (the trucks and tanks were available so we are not talking about ASB-ing the Italians in ersatz Germans riding license produced Tigers), they would have had a very good chance of taking Egypt. For much of 1940 and 1941, Britain was not in a very good position strength-wise. It only reached a (field) strength of 220,000 during (Second) El Alamein and had about 40,000 in 1940. The bulk of the Italian army should have been able to deal with them, had they concentrated their forces on that campaign, especially in 1940-1941.
With Egypt (and parts of the Middle East/Horn of Africa) safely secured, a concerted push into the Balkans would have been feasible, taking those countries the Germans would allow them.
And that is as far as the Italians could go IMO. Kick the British out of Egypt and take the Balkans.