A report by Revolution Consulting found eight of the 20 largest provider groups had a ‘low safety margin' in terms of generating enough profit to pay off debt.
Income among the largest providers of residential care and fostering has grown by 26% over the last two years, although the figure stood at 9% in the most recent year suggesting it is beginning to slow.
But there are also high levels of debt in the sector generated by the acquisition of providers.
The report stated: ‘In many cases the margin for slippage in performance or unexpected financial shocks is thin and needs to be continuously monitored.'
In the case of two of the providers, there was ‘concern as to ability to repay existing loan obligations'.
Revolution echoed recent calls for the Government to establish an ‘oversight and monitoring regime' for children's care providers.
The report also looked at the expanding role of Regional Care Co-operatives in the market.
Following two pathfinder projects in Manchester and the South East, the Department for Education is providing funding for up to six more.
Revolution warned of the possibility of an impact of ‘confidence in the sector and, worst case, precipitate destabilisation of the service base' in the case of fostering providers, where financial performance is relatively weaker.
The Government will also need to consider a joined-up approach to providers with services nationally or in multiple regions, and tackle any competition for resources between co-operatives.
The report concluded: ‘One-size-fits-all procurement approaches have largely failed the sector historically and new commercial approaches are needed with greater risk and reward sharing and relational commissioning approaches adopted around longer term, more stable contracting.'
