Diluted EPS

Hi sir.

There was a question to explain why three measures of profit growth for the same company over the same period can give differing impressions.

It shows 80% growth in profit after taxation, 5% increase in basic EPS, and 2% increase in Diluted eps.

It says that because the diluted EPS has increased less than the basic EPS, it shows that some of the profit increase has been financed by the issue of financial instruments carrying future entitlement to ordinary shares. These instruments will carry a lower finance cost than non-convertible debt, which helps to boost current profits.

I understood until that part but now this part I am lost.

“But this means that the finance costs saved when these instruments are converted will probably be insufficient to offset the adverse effect of the additional shares, leading to dilution. This is an advance warning signal to investors.”

First, what are the adverse effect of additional shares?
Second, why is it an advance warning, isn’t the difference between DEPS’ increase and EPS’ increase is very small? one shows 2% and the other shows 5%, why is it so serious?

Thank you sir.